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Beware of 'buyer panic' in property market

Johannesburg - While a weak economy, the start of interest rare hiking last year, and perhaps a widespread expectation of further future rate hiking, may be starting to keep a bigger portion of aspirant first time buyers "on the sidelines" for the time being, among those still buying homes a significant level of "buyer panic" is perceived, according to John Loos, household and property sector strategist at FNB.

Although the overall first time buyer percentage is receding, it would appear that an increasing portion of these first time buyers are concerned about house price increases and affordability challenges, as indicated in the “buyer panic”-related question in the latest FNB Estate Agent Survey for the second quarter of 2015.

The second quarter survey estimate stood at 44% of total first time buyers, up from the previous quarter and further elevated from the 30% early in 2014.

“Buyer panic” refers to a state of mind where aspirant first time residential market entrants begin to fear that if they don’t buy a home quickly, the price levels will rise to levels where property becomes unaffordable for them.

In the seven quarterly surveys that the question has been part of the survey, the agents surveyed consistently said they perceive a significant percentage of first time buyers who are driven by panic, or “fear that if they don’t buy now it will become too costly for them to afford later”.

READ: The slow puncture of property prices has begun

When such panic sets in, it can cause “inappropriately high” levels of first time buying, with a portion of first time buyers over-extending themselves financially as they attempt to get a foot in the property market “before it is too late”, explained Loos.

This, in turn, can cause market price "overshoots" or sometimes what economists describe as "price bubbles".

While the market still appears far from “crazy”, buyer panic must always be a concern where it exists, cautioned Loos.

First time buyers are estimated to be 21% of total home buyers, lower than the 28% high of the second quarter of 2014, and down on the first quarter 2015’s 25% estimate.

"The SA Reserve Bank has repeatedly warned the public of possible interest rate hiking to come. For first time home buyers and singe-status buyers, therefore, it may not only be about what has happened, but about what is expected to happen," explained Loos.

READ: Interest rate unchanged - as it happened

"The widely publicised expectation is for interest rate hiking to resume at some stage. That is typically the time when first time and single-status buyers decline in prominence, as a portion of them decide to 'wait it out on the sidelines'. This time appears to be similar."  

Since 2013 there has been a lack of further residential affordability improvement - and even perhaps some slight deterioration - as a result of mild interest rate hikes in 2014, according to Loos.

He said affordability "constraints" may be increasingly reflected in the recent decline in both the first time and single-status buyer percentages. These two groups behave more cyclical than the repeat buyer and couples groups, because they are a little more financially constrained and credit dependent on average.

"While the first time buyer percentage still remains high by the standards of the recessionary dip around 2008/2009, the recent decline may just point to gradually mounting home affordability pressures in a weak economy," said Loos.

ALSO READ: Overview of Cape property trends

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