Monday, 28 March 2011

Residential demand strengthens further in the 1st Quarter of 2011

But despite stronger demand, the supply-demand imbalance appears to have deteriorated.

From a property owner/investor's point of view, one would typically want to see a strong market, which implies that demand is strong relative to supply of residential stock.

This relative shortage of residential stock would then lead to solid capital growth of the asset, a strong contributing factor to total financial return on one's property. Unfortunately, the past few years have not seen any meaningful capital growth, due to generally weak demand relative to supply.

In the past two quarters, the FNB Estate Agent Survey once again began to show estate agents perceiving strengthening housing demand, which may be largely seasonal as is customary in the summer season, but which may also be partly due to two further interest rate cuts by the Reserve Bank (SARB) late in 2010.

So, from an agent residential demand activity rating of 5.66 (scale of 1 to 10) in the 3rd quarter of 2010, the level has increased to 6.07 in the 1st quarter of 2011. The agents surveyed in the 1st quarter also reported a very significant increase in the number of viewers at their show houses that they perceived to be "serious buyers".

However, it has become interesting, with the agents surveyed simultaneously report a significant lengthening in the average time of homes on the market prior to sale, from a previous 15 weeks and 6 days to the 1st quarter's 19 weeks and 1 day, as well as an increased percentage of sellers having to ultimately drop their asking price to make the sale, from a previous 80% to 85% in the 1st quarter.

This may suggest that stronger demand has not yet led to an improved market balance, possibly because it is being matched by stronger supply of residential stock on the market. The evidence that we have of stronger supply is perhaps not yet solid, but there are signs. For one, our FNB Valuers as a group have on average been giving stronger supply ratings in their valuation reports in recent months.

As for the estate agents, after an increase in the percentage of survey respondents reporting "stock issues" (constraints) from late-2009 and through the winter of 2010, that percentage declined noticeably in the summer 2010/11 quarters, i.e. the 4th quarter of 2010 and the 1st quarter of 2011.

In addition, when examining the various reasons for selling, we sense that there is evidence of improved supply of stock coming to the market too. The evidence lies in the fact that agents have reported an increase in the percentage of what we call "selling for non-negative reasons". These reasons are "selling in order to downscale due to life stage (e.g. retirement or kids leaving home), selling in order to upgrade, selling in order to re-locate to elsewhere in SA (mostly for better job opportunities), and selling in order to move closer to work or amenities.

We believe that a greater portion of such categories of sellers are not in a rush to sell, compared to those selling in order to downscale due to financial pressure for instance, and thus are possibly more willing to bide their time, coming out of the woodwork in larger numbers when they perceive it to be a relatively good time to sell. Recently, a significant increase in sellers selling for "non-negative" reasons suggests to us that there has perhaps been an improvement in the confidence that sellers have in their ability to get their price, bringing an increased number of aspirant sellers out of their hiding places.

This apparent development on the supply side is all part of the long residential market healing process. One should expect that, after an improvement in demand there should at some stage be an improvement in seller confidence as well.

However, this event would also serve to slow the pace of return to a better market balance, with a better market balance ultimately being reflected in a significantly shorter average time of properties on the market along with a smaller percentage of sellers having to drop their asking price.

It would also be likely to delay the return of respectable growth to house prices. Such is the long slow nature of the residential property market recoveries - patience required.

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