JOHN Loos is FNB household and consumer sector strategist.
SUMMIT TV: The FNB survey of estate agents shows that first-time home buyers accounted for 23% of the residential property market in 2012, which was the same as in 2011. Your report shows the same result as 2011 but is that a good thing?
JOHN LOOS: If we look at the boom years it was slightly higher, at 26% — and 28% at one stage — but those were exceptional years. I’d suggest that 23% is probably a good number — it has to settle somewhere and it’s certainly significantly up from 15% back in 2008, when the economy hit rock bottom. Typically first-time buyers are more cyclical than the overall market — they’re young and flexible and can rent for longer or live in their parents’ homes for longer. When times are better they come out the woodwork in greater numbers so that’s what’s happened in recent years. My guess is it’s probably settled and will fluctuate from quarter to quarter but I wouldn’t be surprised if this year’s numbers come out with similar percentages to the 23% of the last two years.
STV: If we look at the numbers one gets the impression we aren’t going anywhere and we may be stuck at this level.
JL: Yes, if you look at the total volumes of residential transactions that’s significantly lower than in the boom years so it’s still not a market that is flying high. We have seen significant improvements since 2008, where a lot of people have forgotten just how bad the residential market was at that stage, and the banks were a lot more cautious tightening up after the boom. Things are not flying but it’s comfortable now and when one talks to estate agents and market players they are more comfortable than they were three or four years ago.
STV: What does this say about the health of the consumer? One gets the feeling that the household debt situation may be potentially risky — although incomes are rising debt is also rising and unemployment is sitting at around 25% — so it’s not a good picture.
JL: I think we mustn’t fool ourselves — people tend to fool themselves in times of low interest rates, we think everything is okay — but a lot of it is just the impact of low interest rates. Like death and taxes, interest rates will go up — that’s a certainty at some point. One needs to be careful of that and if one looks at the underlying weaknesses of the household sector it still leaves much to be desired. Other parts of the estate agents survey suggest 18% of sellers are still downgrading due to financial pressures and that’s significant although it has improved. The debt-to-disposable income ratio in the third quarter of 2012 was 76%, which is still relatively high although down from 82% back in 2008. All the numbers have improved a bit but all point towards underlying financial frailties. Net savings are zero so gross savings just cover depreciation on fixed assets, so we are under no illusions there is a lot of work to be done before the household sector is in a financially healthy situation.
STV: You say agents believe income levels have kept up with prices...
JL: I put it in the report the other way around, where the percentage of agents that believe incomes have got far behind prices — at one stage in 2008 that was 72%, not surprising at the time; since then we’ve had real price levels decline somewhat, and wage inflation has outstripped house price growth which has helped. Now, in the most recent survey at the end of last year, only 17% of agents believed that income levels were far behind price levels. It’s not only about income outstripping price growth for some time, which improved affordability, it’s also probably about interest rate cuts. I’m not sure one can separate the two. It’s certainly become a lot more affordable for buyers since 2008.
STV: Are you starting to see a narrowing between the races?
JL: We started this survey back in 2005 — I’d love to have records going back to the early 1990s — but in 2005 where these surveys are dominated by the former white suburban markets in the major metros, the three previously disadvantaged groups accounted for 43% of the total buying, that’s gone up year by year during the boom to reach 50% of total buying according to the agents by 2008. The weaker economy took that back where they are in a similar boat to first-time buyers — previously disadvantaged groups rely more heavily on credit and there are more new, young entrants than in the white group, where there are a lot of repeat buyers who are older and less cyclical — so that took the previously disadvantaged group back to 46.2% in 2011 and then in 2012 we saw some improvement, back to 49.2% of total buying. I guess the lesson in this is that better economic growth supports transformation of the residential property market with more new entrants coming in.
STV: On the face of it this almost seems like it’s going nowhere slowly, where the average from 2008 is 29% for those years — is that moving anywhere?
JL: Realistically I’m not sure we can expect it to move any faster — if we look back to the demographics and the skills levels, the imbalances will probably take a few decades to rectify, and those imbalances translate to employment imbalances and that in turn into home-buying imbalances. We have seen some improvements but to see a bigger move in the percentage, I’m not sure we are going to see that with the economic growth we’ve had.
STV: When we look at prices, are South African homes overvalued? When can we expect reasonable value?
JL: I think the market is still overvalued — what I’m saying is for the next few years we will see real house price declines. Normally there is some nominal house price growth but real growth, measured against CPI (consumer price index), shows a decline. Typically this is not out of the ordinary. In the previous stagnation period in the residential market, that lasted all the way from 1984 to 1998 or thereabouts, we saw 14 years of house price declines. That was probably abnormally long because of the politics of the time and other factors but typically in terms of the cycle you can see eight or nine years of real house price growth followed by a similar time of house price declines. It think it’s still overvalued and not made easier by the reality that our economy and the world economy is not performing well. Any oversupply of property is not being mopped up by growing demand at the moment.