Weekend Argus (Saturday Edition)
Affordable areas in demand as costs rise
Slowdown in suburbs where prices are higher than R1.2 million, says FNB property expert
DEMAND for properties in more affordable areas is expected to increase as the rising cost of living and economic stagnation put pressure on households.
Similarly, demand for smaller and more affordable homes with lower running costs is also predicted to grow, says FNB property economist John Loos.
The latest FNB Property Barometer shows property prices of homes in areas where the average prices are in the R360 000 to R1.2 million bracket saw an acceleration of growth in the second quarter of this year.
This is compared to a slowdown in properties in areas where prices are higher than that, up to an average of R2.3m.
The slowing growth at the higher ends of the market is a reflection of a search for relative affordability amid economic stagnation and rising living costs, Loos says.
The index classified the average prices per area categories as:
Luxury area – R2.354m. Upper- income area – R1.273m.
Middle-income area – R895 168.
Lower- middle- income area – R590 309.
Low-income area – R362 579. The Low Income Area House Price Index was again the strongest performer in terms of year-on-year house price growth, recording 16.9% for the second quarter (April to June 2018), and Loos says this is an acceleration on the prior quarter’s revised 15.8%.
He cautions though, that this index includes the social housing component and new homes in this category are often registered at a value that does not reflect any market value. Over the years, there have also been periodic sell-offs of rental stock by municipalities which have not necessarily taken place at market value.
“Such distortions mean that in a repeat sales index for low-income areas, many homes’ prices come off a very low base not reflective of market values, and show major price inflation when resold at market value at a later stage.
“We are thus careful as to how we interpret the results in this low-income area value band, viewing it only for its price growth trends but not for price growth magnitudes.”
Moving one value band up, however, to a segment where data is relatively free of these distortions, Loos says there is support for the view that the lower end has in recent times been stronger than the higher end. The lower-middle income area value band’s year-on-year house-price growth of 8.1% is the second strongest rate behind that of the low-income area value band.
“This rate represents a slight further strengthening on the prior quarter’s revised 8.0% growth rate, and is noticeably faster than a 6.3% rate recorded at the end of 2016.”
The middle- income area value band also showed a yearon-year growth acceleration to 5.5% from 5.3% in the previous quarter.
However, the two higher area value bands continued to show slowing year-on-year growth, as well as being the two segments with the slowest year-on-year growth.
“The growth in the upper-income area value band slowed from 5.3% year-on-year in the first quarter to 4.9% in the second quarter, while the weakest segment, the luxury area value band, saw its growth slow from 4.7% to 4.4%.
“Therefore, off the highest growth base a few years ago, the luxury area value band’s rate has slowed the most significantly of all five value bands since around 2014, to reach the slowest rate of all the segments by the second quarter, 2018.”
In the weak economic times, with real gross domestic product growth of a mere 0.75% in the the first quarter, Loos says a financially constrained household sector is expected to continue to search for relative affordability in greater numbers, which plays into the hands of the lower end of the market.
“Not only is the stagnant economy constraining real disposable income growth, but an ongoing variety of tax rate increases lift the cost of living too. These include ongoing personal tax increases, which are structured to impact more heavily on higher- income groups, and a 2018 VAT increase.
“Municipal rates and utilities tariffs continue to increase at above CPI inflation, raising home operating costs and making especially the larger and more expensive homes significantly more costly to own and run.”
On top of this come the series of fuel levy increases, Loos says, and these impact heavily on the private transport-dependent higher-income groups.
“Indeed, of late it is the higher income/ expenditure groups whose CPI inflation rates are the highest.”
He says a broad shift in a portion of demand towards more affordable areas, and smaller and more affordable homes whose running costs are lower, should thus be expected in these times of multi-year economic stagnation along with a rising cost of living.