Upper Income Property weakest Link

Category Property News

For the four quarters up to and including the second quarter of 2015, the sample of FNB Estate Agent Survey respondents from the middle income area segment of the residential market returned the highest estimated activity rating for their areas.

However, the most noticeable increase in activity in recent times has been seen in the lower income segment.

The FNB Estate Agent Survey is of a sample of estate agents predominantly in the major metro regions. The first question asked of agents concerns their perceptions of residential activity in their areas, on a scale of 1 to 10, with 10 being the strongest level of activity.

This report focuses on the four income segments defined in the survey.

The four income segments are defined by agents working the areas, and comprise the high net worth segment (average price = R4.62 million), the upper income segment (average price = R2.65m), the middle income segment (average price = R1.46m), and the lower income segment (average price = R888 300).

Examining average agent activity ratings (scale of 1 to 10) by segment for the four quarters up to and including the second quarter of 2015, the high net worth segment recorded the lowest average rating of 5.85 over the four quarters, and the upper income segment the second lowest with 6.60, both segments having seen their average ratings decline of late. The high net worth segment's decline has been far more pronounced.

The stronger part of the market has been at the middle to-lower end, with the four quarter average activity rating of the middle income area segment having measured 6.86, the highest of the four income area segments, but the lower income has played a big catch-up to average a now similar 6.79.

For the four quarters until the second quarter of 2015, the average estimated time of homes on the market before sale was lowest in the middle income segment at 9.1 weeks, followed closely by the lower income segment with 9.9 weeks.

The other measure of price realism is the percentage of sellers having to drop their listing prices to make the sale. Although this percentage has recently risen in all segments, the high net worth segment has become the segment with the highest estimated percentage in the past year or so, which was not the case through 2011 to 2014. The lower income segment was lower than the rest, with a four-quarter average of 80.5 percent of sellers having to drop their listing prices up to the second quarter of 2015. The middle income segment had a percentage of 82.8 percent, the upper income segment 85.3 percent, and the high net worth segment 88 percent.

A noticeable feature of recent FNB Estate Agent Surveys by segment in recent quarters has been a decline in the percentage of sellers believed to be selling to upgrade to better homes. Such a decline in this motive for selling should play into the hands of the lower income areas' markets, because these areas have seen the largest percentage of upgrade related selling by far in recent years. So, if there is a noticeable slowdown in upgrading, we believe that it should ultimately contribute more toward supply constraints at the lower income end, as more would-be upgraders stay put.

By the second quarter of 2015, the four-quarter moving average percentage of sellers believed to be selling in order to upgrade, for the lower income areas, had declined to 21 percent, from 25 percent as at the final quarter of 2014.

By comparison, the middle income (17 percent) had just started to show signs of decline, while the upper income (15 percent) and high net worth (15 percent) income area segments had shown noticeable declines in their percentages in recent times.

Therefore, especially the middle income area segment, and to a lesser extent the upper income area segment, may be receiving less of a boost from upgrading out of the lower income segment of late.

In addition to a slower pace of upgrading to higher valued properties, the survey also points to a higher rate of selling to downscale due to "life stage", which refers to sellers who no longer have the need for large or costly homes due to children having left home, or because they are ageing and the running of a large home becomes a hassle.

For the market as a whole, this reason for selling is believed to be the single-biggest one, and is more pronounced at the higher end of the market, with the high net worth area segment estimated to have had 28 percent of total sellers selling for this reason over the past four quarters, compared with 27 percent in the upper income segment.

By comparison, middle income areas had an estimated 26 percent, and lower income areas a significantly lower 19 percent.

The trend in selling to downscale due to life stage has been upwards in recent times in all four segments. But given the higher percentages of these sellers at the higher end, one would think that this form of downscaling would provide mildly greater support to the lower priced segments, as a portion of these sellers shift "downward".

This, along with a slower pace of upgrading, we believe is the apparent explanation for the high net worth segment having the weakest indicators emanating from the survey, and the lower and middle income area segments having the strongest showing.

The broad picture emanating from the FNB Estate Agent Survey by segment is one of relative weakness on the high end, notably the high net worth segment, and relative strength in the middle income area segment with the lower income area segment having significant caught up to the middle income segment.

The driver of mounting relative higher end weakness is a "back to basics" approach by a rising percentage of households, it would appear, including a slowing in the pace of upgrading to better properties, along with a rise in the pace of downscaling due to life stage.

While the high rate of downscaling due to life stage is not theoretically driven by financial stress, it is possible that the rising costs associated  with homes is encouraging ageing households to speed up their rate of downscaling.

Certain developments in recent years have worked against owning large and more expensive homes, and perhaps these are starting to constrain the higher end a little more than the rest. These include:


  • A newly introduced higher 11 percent property transfer duty bracket kicking in at R2.25m and above.
  • A stagnation to noticeably weaker economic and household sector disposable income growth in recent times, since a peak around 2010/11.
  • Last year's start to the interest rate hiking cycle, which has contributed to a gradually rising household debt-service ratio (interest on household debt expressed as a percentage of disposable income), with widespread expectation of future interest rate hiking.
  • Steadily rising municipal rates and tariffs, with another above-inflation hike in Eskom tariffs recently being introduced.
  • House price inflation of recent years that has more or less kept up with average income growth, translating into a lack of further home affordability improvements.

But the shift towards a more conservative approach in the residential market, by the household sector, of late may furthermore be affected by general consumer confidence,

The second quarter's FNBBER Consumer Confidence Index was a "shocker" at best, with its negative level of - 15 being the lowest since 2000.

The cause of such a consumer confidence drop may go further than actual deterioration in household finances to an expected deterioration, which can be caused by a generally negative economic policy environment in SA at present, along with heightened social tensions and an electricity crisis.

This heightened uncertainty looks set to be with us for some time, and can contribute to a more cautious approach by the household sector. Most of the above appears likely to play relatively into the hands of the lower and middle income end of the market, which could see superior market strength lower down, compared to the high end of the market, in the near term. (Courtesy of John Loos – Household and property sector strategist at FNB Home Loans)



Author: FNB

Submitted 18 Aug 15 / Views 3362