Demand for Residential Property Surges (The Bugle)

There seems to be a contradiction in the residential property market at the moment. On the one hand we are seeing improving demand along with increasing supply constraints across certain price brackets. On the other hand we have seen a slowing of real household disposable income growth, weaker consumer confidence and lower economic growth. So what is going on? Is the surge in demand we have seen this year just a cyclical peak or is it part of a trend? Is it sustainable? 

The post recession period (after 2009) has seen two mini-surges in demand. The first was in 2010 in response to the interest rate cutting that preceded this period. The second was from late 2011 to present, with a bit of a lull in-between. This can be clearly depicted by FNB’s market strength index, which measures the difference between the FNB Valuer’s market demand rating and market supply rating. These two indices are heading towards each other as demand increases and supply decreases. So although the FNB Market Strength Index is at 47.32, just below the critical 50 level where overall demand equals supply, it is heading in the right direction and estate agents in general will be able to testify to this higher level of buying activity being experienced.  Nominal House Price growth as measured by FNB is currently 6,4% year-on-year and moving up marginally. ABSA’s latest published figures indicates nominal house price of 9,8%, which is trending downwards. The 10-year overview in FNB’s House Price Index indicates nominal house prices up 139.48% in August 2013 compared to August 2003. In real terms, adjusted for inflation, this index is up 37.99% over the same period. We can expect overall nominal house price escalation for 2013 to be in line with CPI inflation of around 6%. This means that it really does remain a buyers market even though the volume of transactions has picked up. 

As the growth in mortgage extensions has been marginal the surge in demand is not being fueled by more favourable debt conditions as interest rates remain unchanged and lending conditions are still tight. The number of cash buyers could be one explanation for the surge in demand. Most people will only sit on cash for so long as they understand that when the return on money market funds is similar to the inflation rate, their real returns are close to zero. Equity markets have been volatile and unpredictable. The JSE All Share index was up 8.3% in Rand terms on 7^th September since the beginning of the year, but actually down by 10% when measured in US Dollar terms. In contrast the US Dow Jones Industrial Average index is up by 13.9% since the beginning of the year and the US S&P 500 index up by 15.9%. You can understand why foreign money has preferred the relatively safe and higher returns offered by the US equity markets. While none of us have a crystal ball, the welcomed recovery in demand for residential property is something we hope will continue.

(Author: Andreas Wassenaar, published in The Bugle, 11 Sep. 2013)