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
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.