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Johannesburg - Sectional title properties appear to be outperforming the full title market, according to the latest FNB Property Barometer.
According to John Loos, household property sector strategist at FNB, this comes after the sectional title market had largely underperformed between 2005 and 2012. This improved the affordability of sectional title properties considerably compared to the full title market.
Loos is not surprised at the sectional title market outperforming the full title market.
"This is arguably in line with the 'smaller is better' theme that appears to run through the market of late, as home-related operating costs rise strongly, and a slowing economic growth rate, coupled with rising personal tax rates, constrains the growth in household disposable income," he explained.
The year-on-year growth rate in FNB's Sectional Title Market Strength Index, peaked at 10.2% in the first quarter of 2014, whereas the Full Title Market Strength Index peaked at a lower 5.2% growth rate.
"Since early-2014, however, although the sectional title market strength level remains above that of full title, both segments’ rates of strengthening have slowed. This is arguably the impact of slowing economic growth along with the start of interest rate hikes early in 2014," said Loos.
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House price inflation
In the second quarter of 2015, the strongest year-on-year (y/y) average house price inflation - namely 11.4% - was found in segment of sectional title properties with fewer than two bedrooms. The average house price inflation for two bedroom sectional title properties was 7.9%.
"The relative weak spot in the sectional title segment appears to be the larger three bedroom sub-segment, which inflated by 5%, and was the only one of the three sectional title sub-segments to be showing slowing average house price growth in recent quarters," Loos pointed out.
READ: Beware of 'buyer panic' in property market
Full title segment
In the full title segment, all three major sub-segments were showing slowing price growth.
Houses with two or fewer bedrooms were the strongest full title sub-segment, recording 7.2% y/y price inflation. This sub-segment, with an average price of R577 522, is the cheapest of the full title sub-segments, and much of it falls into the so-called affordable housing market.
The full title sub-segments for homes with three bedrooms and homes with four bedrooms and more were the weaker parts of the full title market with 4.5% and 4.9% house price inflation respectively.
In Loos' view three factors may have supported this trend.
Firstly, from 2009 until 2014 SA had a steady rise in first time buying levels expressed as a percentage of total home buying. It peaked at 28% of total home buying in the second quarter of last year.
"We suspect that these financially 'limited' buyers are a key source of demand for smaller sized sectional title units," said Loos.
Secondly, there has been a small increase in buy-to-let buying during the residential recovery period. Sectional title units may, therefore, attract a greater portion of this source of demand.
Thirdly, FNB believes that it may be very much about affordability, not only of home values, but also home running costs.
"Perceptions that crime may be getting worse again, despite official crime stats suggesting the contrary, could be fuelling greater demand for 'secure' cluster living," said Loos.
"This is often sectional title and lowers the average cost of somewhat expensive security measures and communal amenities. And of course the municipal rates and tariff increases continue strongly with no end in sight."
Loos cautioned, however, that no market segment can deny “economic gravity” indefinitely, and the FNB Valuers’ Market Strength Indices for both the full title and sectional title segments have shown a slowing in their pace of strengthening since early-2014.
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