FNB Property Barometer Estate Agency Survey - Reasons for Selling Q2 2014

The ageing middle class remains by far the key driver of residential property selling, with financial stress-related sales still “behaving”

In the FNB Estate Agent Survey, one of the questions asked of survey respondents is to provide an indication as to the key reasons for selling. 8 categories of reasons for selling primary residential properties are provided. They are “Downscaling due to financial pressure”, “Downscaling with Life Stage”, “Emigrating”, “Relocating to Elsewhere in SA”, Upgrading”, “Moving for Safety and Security Reasons”, “Change in Family Structure”(Death, Divorce, etc)”, and “Moving to be Closer to Amenities”.

The largest percentage of sellers, i.e. 26% is believed to fall into the category “Downscaling due to Life Stage” as at the 2nd Quarter 2014 survey. This form of downscaling refers to those sellers who desire a smaller home, usually either because they are getting older or because their offspring have left home.

This estimated percentage of 26% is a new high for this group, being the highest percentage that we have recorded since introducing this survey question back late in 2007.

This percentage has also more than doubled since a low point of 12% reached back in the 2nd quarter of 2008 in far weaker market times.

This group of ageing sellers appears to be “pro-cyclical” in their behaviour. They are not by-and-large financially stressed, and can thus wait for a “good time” to sell their property. The currently high percentage of these sellers, which has steadily crept higher since the end of the 2008/9 recession, is thus reflective of the current period of relative residential market strength.

However, this high percentage also has partly to do with South Africa’s ageing population, especially in the middle and upper income groups, with the fastest growing age cohorts in their 50s and 60s..

NO SIGN YET OF ADDITIONAL FINANCIAL STRESS-RELATED SELLING, DESPITE THE START OF INTEREST RATE HIKING AND RECESSIONARY CONDITIONS

Our survey respondents in the 1st quarter of 2014 continued to point to financial pressure-related selling (“selling in order to downscale due to financial pressure”) remaining significant at 14% of total selling. This is slightly down from the previous quarter’s 15%, although not too much should be read into one quarter’s fluctuation.

At the current time, the percentage of sellers under financial pressure is not troublesome, and vastly improved from the 34% peak back in 2009.

Reasonable nominal house price growth in recent times would probably make it relatively easy for households to trade out of properties without incurring too serious a financial loss. However, such situations become far more troublesome when interest rates rise, as residential demand and prices are often suppressed, the number of sellers under financial pressure increases, and losses when trading out can become more significant.

This percentage of financial stress-related downscaling serves as an ongoing indication as to the very significant number of people that “over-commit” financially when purchasing a property, and are later required to incur substantial transaction costs in order to reverse the process by downscaling. While relatively low compared to back in 2009, it remains a significant percentage given that interest rates have been so low for so long in recent years.

While we have yet to see any rise in downscaling due to financial pressure as a result of deteriorating economic times and the start of the rate hiking cycle, we may be starting to see a change in the behavior within this group of sellers.

When these households sell in order to downscale, they have the option of buying a cheaper property thereafter, or moving into a rental property.

When we first questioned agents on the split between those “financial stress-related downscalers” planning to rent vs buy, back in the 2nd quarter of 2011, they estimated that 51% of this group were planning to rent a home versus 49% planning to buy. By the 1st quarter 2014 survey, this had swung to 66% believed to be planning to buy vs only 34% planning to rent. Then, in the 2nd quarter 2014 survey, we saw a noticeable turn back towards renting, the “planning to rent” percentage rising to 39% from the 1st quarter’s 31%. We’ll need to wait for further surveys to confirm any trend change, but we would expect further rise in this rental percentage in coming quarters based on our expectation that the SARB (Reserve Bank) is set to gradually raise interest rates further. This is a potential source of support for the rental market.

The other key selling group is those households who are financially more solid and are planning to upgrade to a “better” home. The percentage of sellers selling in order to upgrade remains slightly off its high of 20% reached at the end of 2013, having recorded 18% in the 1st 2 quarters of 2014.

Looking forward, FNB’s expectation of further interest rate hiking through 2014/15 leads us to expect that “downscaling due to financial pressure” will see its percentage increase mildly towards 2015, while upgrade-related selling will see its percentage decline.

EMIGRATION SELLING STILL VERY SUBDUED

Of the 8 categories of selling motives, the 4th one that we like to monitor closely is “Selling in order to emigrate”. This is particularly of interest with South Africa in a period of seemingly heightened social tension, and due to the fact that our surveys back in 2008 suggested that this motive for selling was one of the largest drivers of residential supply.

For the time being however, a deterioration in sentiment towards South Africa still does not appear to have brought about any noticeable renewed emigration surge. But this is believed to be due to economic and employment weakness abroad in recent years, and it is believed that domestic sentiment would have to improve prior to a further global economic strengthening if we are to avoid returning to heightened emigration rates.

From a previous quarter’s 3.4% of total sellers, estimated emigration-related selling declined slightly to an estimated 2.8% of total selling in the 2nd quarter Agent Survey. The percentage thus remains hovering around the 3% mark, where it has been since 2012

IN CONCLUSION

The analysis of the various reasons for selling appears to confirm that we are still currently at a relatively strong stage of the property cycle, despite the 2nd Quarter 2014 Estate Agent Survey pointing to a slight decline in overall residential market activity levels.

This conclusion is supported by grouping the various reasons for selling into what we perceive to be “Pro-Cyclical Reasons”, i.e. those categories that tend to increase in significance as the economic/property gathers momentum and vice versa in slowdowns , “Counter-Cyclical Reasons”, i.e. those categories that diminish in significance in better economic and market times and increase in prominence in weaker times, and “Non-Cyclical Reasons”, which have no obvious correlation with the economic/market cycle.

Using smoothed trendlines, we continue to see a broad rising trend in the Pro-Cyclical reasons for selling, which include Selling in order to downscale due to life stage, selling in order to upgrade, relocating within South Africa, and Selling in order to move closer to work or other amenities.

Conversely, the Counter Cyclical component, which is solely “selling in order to downscale due to financial pressure”, remains on a broad declining trend.

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05 Aug 2015
Author John Loos

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