Selling to downgrade a sign of things to come - property expert

Jan 13 2016 18:24
Carin Smith

Cape Town - The increase in the percentage of owners selling residential property to downscale due to financial pressure is a possible hint of things to come, John Loos, household and property sector strategist at FNB Home Loans, said on Wednesday.

"It appears as if the household sector is preparing itself for a tougher economic and financial period, and probably responding gradually to the SA Reserve Bank’s ongoing interest rate hiking," said Loos.

"We know that consumer confidence is weak, so a more cautious approach to home buying and selling should come as no surprise. The economy remains on its long term path of stagnation moving into 2016."

READ: Housing market points to looming recession - expert

The FNB Estate Agent Survey for the fourth quarter of 2015 reflects the gradually more conservative approach to spending as financial and affordability limitations become more acute.

"This is perhaps seen in a decline in selling in order to upgrade to a better and more costly property, and possibly ties in with currently weak consumer confidence as seen in the FNB Consumer Confidence Index," said Loos.

Only about 15% of survey respondents in the fourth quarter indicated that they were selling in order to upgrade, compared to 18% of respondents in the third quarter survey. Loos said this is noticeably down from the 20% high reached in late 2013.
Loos said recent surveys have begun to point to the possibility that residential affordability challenges have slowly begun to mount. To him this could tie in with estate agent perceptions that affordability did deteriorate mildly in 2015 compared with 2014.

"This is not to say that there is any meaningful sign of an increase in financial stress yet, but rather that households’ spending on non-essentials may be diminishing in significance as a more cautious approach to household finances sets in," explained Loos.

The estimated percentage of sellers “selling in order to downscale due to financial pressure” rose slightly from 11% in the third quarter of 2015 to 14% in the fourth quarter.

"However, such a move can possibly be mere data volatility, so we will need a few more quarters to confirm the start of any upward trend," cautioned Loos.

READ: Climbing interest rate strains property market

He pointed out that the latest figure for people selling in order to downgrade due to financial pressure is still far below the 34% high reached during 2009.

Yet, the survey showed a higher portion of these sellers expected to “rent down” as opposed to the often more costly “buying down”, when compared to 2014.

"One would expect this after some years of abnormally low interest rates and some 'deleveraging' by the household sector. This category will be watched closely in coming quarters for signs of further increase," said Loos.

Past surveys indicated that through much of 2013 to 2014, the estate agents surveyed believed that above 60% of sellers “selling to downscale due to financial stress” were intending to buy a cheaper property, and nearer 40% would move into a rental property.

Early in 2015, the percentage believed by the agents surveyed to be intending to “rent down” jumped quite significantly to above 50%.

"Although receding back to 46% in the two latter quarters of 2015, this group’s percentage remains noticeably higher than in 2013 and 2014, again pointing to a more conservative approach by
households to their finances," said Loos.

"This change may be supportive of a higher demand for rental properties. This plays increasingly into the hands of the rental market, something which is perhaps to be expected as many wait to see what the SA Reserve Bank (Sarb) is going to do on the interest rate front, and given near recessionary economic conditions."

ALSO READ: The right to expropriate property

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fnb  |  john loos  |  property  |  sa economy



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