FNB Estate Agents' Survey finds market gaps between income groups widening

The survey is of a sample of estate agents predominantly in SA's major metro regions. The first question asked to agents is with regard to their perceptions of residential demand in their areas, a subjective question on a scale of 1 to 10, with 10 being the strongest level of demand.

The four income segments are self-defined by agents working the areas, and comprise the High Nett Worth segment (average second quarter 2013 price = R3.636 million), the Upper Income segment (average price = R2.411 million), the Middle Income segment (average price = R1.15 million), and the Lower Income segment (average price = R724 700).

Examining average agent activity ratings (scale of 1 to 10) by segment for the four quarters up to and including the second quarter of 2013, the Lower Income segment still comes out top with an average rating of 6.52, slightly ahead of the Middle Income segment on 6.46 and, more significantly, ahead of the Upper Income segment on 6.08, and the High Nett Worth segment on the lowest level of 5.82.

In terms of the relative performances of segments, after a significant narrowing of the activity gap between Upper Income Areas on the one hand, and Lower and Middle Income Areas on the other, during 2012, the first half of 2013 appears to have seen the Lower and Middle Income Area Activity ratings once again start to accelerate away from the two higher income areas.

High Nett Worth segment lagging

Although having improved through 2012, the activity rating for the High Nett Worth segment continues to lag the other three segments noticeably.

A noticeable feature of the Lower Income Area Segment over the past four quarters has been a steady rise in the percentage of sellers believed to be selling in order to upgrade to a better home, reaching 22.25%. So, while solid first-time buying, in these times of low interest rates and relatively easy access to credit, is probably a key driver of the superior activity levels perceived in the Lower Income Areas, strong levels of selling in order to upgrade in Lower Income Areas may be a key driver of activity levels in the next segment up, i.e. the Middle Income Area Segment, as a group of sellers moves upward to their next purchase.

By comparison, the Middle Income Area segment has a significantly lower 16.25% of sellers selling in order to upgrade and, unlike the Lower Income Area Segment's steady rising trend in "upgrade-related" selling, its own upgrading percentage has been trending sideways-to-lower over the past year. Similar stagnant trends in upgrading have been witnessed in the Upper Income and High Nett Worth Areas too.

So, whereas the Middle Income Area Segment may be receiving a strong boost from upgrading out of the Lower Income Segment, the Upper Income and High Nett Worth Areas may not be receiving quite the same level of support from the immediate level below them.

Lower End segments have also seen the financial strength of their homeowners improving at a more rapid rate than all of the other three segments, since the height of financial stress in 2009.

So, compared to a peak of 38% back in the second quarter of 2009, Lower Income Areas have seen their estimated percentage of sellers believed to be downscaling due to financial pressure decline to 17.5% for the four quarters up until and including the second quarter of 2013.

Low interest rates mask many financial frailties

A word of caution is required here. It is important to remember that low interest rates mask many financial frailties, so one must be careful of drawing conclusions as to how sustainable this better financial performance is when tougher times come again one day, but for the time being the improved homeowner financial performance is noticeable, and more supportive of the property market, especially at the Lower Income End. And over the past four quarters, the Lower Income Area financial stress-related downscaling percentage has even moved below the percentages of Middle Income Areas (18.75%) and Higher Income Areas (18.25%), with only High Nett Worth Areas having a lower percentage of 16.5%.

The Lower and Middle Income segments still appear to maintain a significant gap between themselves on the one hand, and the Upper and High Nett Worth Segments on the other hand, in terms of more realistic pricing.

For the four quarters up until the second quarter of 2013, the average estimated time of homes on the market prior to sale for the Lower and Middle Income segments, was 12.2 weeks and 13.9 weeks, respectively. By comparison, the Upper Income and High Nett Worth segments recorded 18.6 weeks and 19.8 weeks, respectively. While one should normally expect higher end homes to be on the market for longer, the fact is that the gap between these segment estimates widened in the first half of 2013, with the two higher end segments' times on the market rising, while the Lower and Middle Income Area Segments saw declines.

The other measure of price realism is the percentage of sellers having to drop their asking price to make the sale. Here, too, the Lower Income segment remains ahead at 79.5% of total sellers for the past four quarters, and this segment has also showed the largest improvement since early 2012, whereas all three other segments have seen mild increases in this percentage in the first half of 2013.

With demand appearing relatively stronger in the Lower and Middle Income segments, it is probably unsurprising that the percentage of agents citing stock constraints as an issue has been slightly higher in the Lower and Middle Income segments than in the Upper Income and High Nett Worth segments.

And indeed this was the picture in the first half of 2013, with 18.2% of agents in the Lower Income segment citing stock constraints, 17.7% in the Middle Income areas, 16.9% in Upper Income Areas and 16% in High Nett Worth areas.

The gap between the segments is not large though, with Lower Income Area stock constraints probably being prevented from getting too extreme, despite stronger demand, by stronger building activity at this end than in the higher income segments.

Lower Income segment's sample of agents more upbeat

Therefore, in short, when examining the FNB Estate Agent Survey by Income segment, we continue to see the Lower Income segment's sample of agents being more upbeat on activity than the segments further up the income/price ladder. After having shown some significant catch up through 2012 by the Upper Income and High Nett Worth Area segments, 2013 to date appears to have seen the gap in market fundamentals between these two segments and the two lower priced area segments widening once again, as activity level ratings accelerated more strongly in the Lower and Middle Income Segments.

Indeed, not only in terms of activity levels, but in terms of other market indicators, too, especially the Lower Income Area segment has shown a noticeable improvement. These improvements include a steady rise in "selling in order to upgrade", the most impressive decline in "selling in order to downscale due to financial pressure" off a very high base since 2009, and declines in both the average time on the market as well as the percentage of sellers having to drop their asking price.

So, in short, the Lower Income Area segment appears to possess the most solid market fundamentals of the four income segments, followed closely by Middle Income Areas. One must sound the necessary cautions, however. The Lower Income segment can be more extremely affected by economic and interest rate cycles both in a negative way in bad times and in a positive way in good times. Currently, abnormally low and stable interest rates play more into the hands of the Lower Income Area segment than is the case for the higher income end, and the results are showing in this segment's superior performance, it would appear. But the recent solid performance by this segment does not necessarily mean that its superiority is sustainable once the interest rate cycle turns. That will depend on how households are using (or not using) this period of low interest rates to adjust their "balance sheets".