Win­ter plays a ma­jor role in ex­pec­ta­tions

Sec­ond quar­ter sur­vey points to weak­en­ing hous­ing mar­ket and a lack of op­ti­mism for the near fu­ture amongst agents

Weekend Argus (Saturday Edition) - - PROPERTY - JOHN LOOS

EX­AM­IN­ING the sec­ond quar­ter 2016 FNB Es­tate Agent Sur­vey re­sults for res­i­den­tial mar­ket ac­tiv­ity and de­mand per­cep­tions of agents, it would ap­pear that the sec­ond quar­ter once again points to hous­ing mar­ket and pos­si­bly eco­nomic weak­en­ing com­ing.

This comes af­ter a mild strength­en­ing in the first quar­ter re­sults, and it was that first quar­ter im­prove­ment that may have been re­flected in mildly faster na­tional av­er­age house price growth in the sec­ond quar­ter of this year.

The South African com­po­nent of the FNB Es­tate Agent Sur­vey is a sur­vey of a sam­ple of es­tate agents pre­dom­i­nantly in SA’s ma­jor metro re­gions. A key ques­tion asked of agents con­cerns their per­cep­tions of res­i­den­tial mar­ket ac­tiv­ity in their ar­eas, a sub­jec­tive ques- tion on a scale of 1 to 10, with 10 be­ing the strong­est level of ac­tiv­ity.

The sec­ond quar­ter 2016 res­i­den­tial ac­tiv­ity in­di­ca­tor de­clined to 5.77, from the pre­vi­ous quar­ter’s 6.39. The cu­mu­la­tive de­cline has now be­come no­tice­able since the 6.73 high of the first quar­ter of 2015.

Quar­ter to quar­ter fluc­tu­a­tions, how­ever, can be driven to a sig­nif­i­cant de­gree by sea­sonal fac­tors preva­lent in the hous­ing mar­ket. To ex­am­ine the strength of the mar­ket ex­clud­ing sea­sonal fac­tors, we cre­ate a sta­tis­ti­cally sea­son­ally ad­justed ac­tiv­ity rat­ing. Ac­cord­ing to this mea­sure, too, the ac­tiv­ity rat­ing dropped in the sec­ond quar­ter of 2016, from 6.11 in the first quar­ter to a level of 5.9.

Given such a de­cline in the ac­tiv­ity rat­ing, this could beg the ques­tion as to where the sec­ond quar­ter ac­cel­er­a­tion in more to do with de­mand and ac­tiv­ity lev­els in pre­ced­ing pe­ri­ods. And in the first quar­ter of the year, while the non­sea­son­ally- ad­justed ac­tiv­ity rat­ing rose from the prior quar­ter, the sea­son­ally ad­justed ac­tiv­ity rat­ing saw its down­ward trend vir­tu­ally tem­po­rar­ily stall at 6.11, al­most un­changed from 6.12 in the fi­nal quar­ter of 2015.

This vir­tual tread­ing of wa­ter in ac­tiv­ity lev­els ap­pears to have been brought about by a slight rise in de­mand dur­ing the first quar­ter, which re­spon­dents in the sur­vey point to­wards when es­ti­mat­ing the av­er­age num­ber of se­ri­ous view­ers of show houses. In the first quar­ter sur­vey, they es­ti­mated the av­er­age num­ber of se­ri­ous view­ers a show house to have risen from 11.3 in the pre­ced­ing quar­ter to 11.6, but more sig­nif­i­cantly, this was up from the 11.05 view­ers for the cor­re­spond­ing quar­ter of 2015.

In short, the FNB Es­tate Agent Sur­vey pointed in some way to a tem­po­rary stalling in the na­tional hous­ing mar­ket’s weak­en­ing de­mand and ac­tiv­ity trend dur­ing the first quar­ter of 2016. This is per­haps re­flected in a slightly im­proved house price growth rate in the sec­ond quar­ter of 2016. How­ever, dur­ing the sec­ond quar­ter, a re­sump­tion of weak­en­ing in de­mand and ac­tiv­ity lev­els, as per­ceived by re­spon­dents in the sur­vey, sug­gests that a re­turn to slow­ing av­er­age house price growth could re­sume in the near term.

In the res­i­den­tial ac­tiv­ity rat­ing’s short 12 year his­tory, the short term trend changes in its year on year rate of change ap­pear to have very of­ten led or cor­re­sponded with the trend changes in lead­ing busi­ness cy­cle in­di­ca­tors such as those of the Re­serve Bank or the OECD, as well as lead­ing real eco­nomic growth. Re­newed ac­tiv­ity rat­ing de­cline in the sec­ond quar­ter may thus point to re­newed eco­nomic weak­ness in the sec­ond half of 2016.

On bal­ance, agents ex­pected very lit­tle near term strength­en­ing in res­i­den­tial ac­tiv­ity lev­els in the sec­ond quar­ter sur­vey. We ask agents for their ex­pec­ta­tions of res­i­den­tial ac­tiv­ity lev­els in the near term, that is, the three months sub­se­quent to when the sur­vey takes place, re­quest­ing them to choose be­tween three op­tions – that ac­tiv­ity will strengthen, weaken, or re­main the same.

In the sec­ond quar­ter sur­vey, 13 per­cent of agents ex­pected ac­tiv­ity to in­crease in the next three months, while 57 per­cent ex­pected it to stay the same and 30 per­cent ex­pected a de­crease in ac­tiv­ity.

This weak ex­pec­ta­tion is to be ex­pected when one moves into the slow win­ter pe­riod, sea­son­al­ity thus play­ing a ma­jor role in dam­p­en­ing ex­pec­ta­tions. Nev­er­the­less, re­cent weak read­ings ap­pear to be more than just about sea­sonal fac­tors.

The home buy­ing con­fi­dence in­di­ca­tor in its un­smoothed form, the com­bined re­sult of the var­i­ous agent ex­pec­ta­tions, de­clined from the pre­vi­ous level of +0.01 (on a scale of 1 to -1) to -0.17, as one could ex­pect with the win­ter sea­son’s lull ap­proach­ing at the time of the sur­vey. How­ever, it is also lower than the sec­ond quar­ter of 2015’s pos­i­tive read­ing of +0.01, im­ply­ing a year on year de­cline.

In or­der to ex­am­ine the broader pic­ture re­gard­ing es­tate agents ac­tiv­ity ex­pec­ta­tions, elim­i­nat­ing sea­sonal fac­tors and data volatil­ity, we use a four quar­ter mov­ing av­er­age of the home buy­ing con­fi­dence in­di­ca­tor. This av­er­age has shown a no­tice­able de­cline to a low sim­i­lar to that last seen in early 2012.

In a fol­low up ques­tion to the agent ac­tiv­ity level ex­pec­ta­tions ques­tions, we ask agents to pro­vide us with the fac­tors that in­flu­ence their near term ex­pec­ta­tions.

Of key con­cern, though not sur­pris­ing, is that the most com­monly cited fac­tors re­late to eco­nomic stress/pes­simism, cited by 41 per­cent of re­spon­dents, while pos­i­tive con­sumer sen­ti­ment is only cited by 9 per­cent.

This re­flects a broad de­te­ri­o­ra­tion in agents’ per­cep­tions of sen­ti­ment in the mar­ket, with the per­cent­age cit­ing eco­nomic stress/pes­simism hav­ing risen steadily since early 2015.

● John Loos is the house­hold and prop­erty sec­tor strate­gist at FNB Home Loans.

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