Most SA home sellers are being forced to drop their asking price to make the sale

In a constrained economic climate, which often comes with rising interest rates, the residential property market tends to move away from the ‘market equilibrium price’ due to resistance by sellers to drop their price, says FNB.

According to household and property sector strategist at FNB Home Loans, John Loos, prices can become less realistic, relative to demand, and this is often reflected in fluctuations in the average time of homes on the market prior to sale.

FNB noted that the average estimated time of homes on the market increased from 11 weeks and a day in the first quarter of 2016, to 15 weeks by the final quarter, as measured in the lender’s FNB Estate Agent Survey.

“The key question is what would be the average time on the market that reflects market equilibrium?”

“The answer to this is a subjective one, but our view is that the level is not far from three months average time on the market,” Loos said.

“Therefore, we believe that the 15 week time on the market reflected a move away from equilibrium, and indeed our FNB House Price Index has shown some decline in house prices in real terms – when house price inflation is adjusted for CPI inflation.”

However, in the first quarter of 2017, amid more positive economic sentiment, the estimated average time of homes on the market declined from the previous quarter’s 15 weeks, to 13 weeks and 4 days, FNB said.

But a decline in the average time of homes on the market is about the interaction between demand and supply, not just about rising demand, the bank stressed.

It said that the issue of residential stock constraints is by no means as acute as it was in the first quarter of 2015 when 24% of agents surveyed cited such stock constraints as a key issue in their areas.

“But the percentage of agents citing stock constraints has risen recently from a low of 6.7% as at the third quarter of 2016, to 12% by the first quarter of 2017, suggesting that residential supply relative to demand has once again tightened,” said Loos.

Under such conditions, one would expect homes to trade at a faster rate, and for the average time of homes on the market to decline, which is what appears to have happened in the first quarter of 2017, the analyst said.

Cape Town’s sample of agents surveyed reported by far the highest percentage of residential stock constraints in their areas – 35%, while the next highest was Ethekwini Metro with a 14% estimate.

Sellers dropping their price

A further indicator of residential asking price realism is the estimated percentage of sellers being required to drop their asking price in order to make the sale. This percentage remains high, at 90% of sellers, “and as yet we have not seen a decline in it,” said Loos.

“However, there was some diminishing in the estimated percentage by which the asking price is required to drop, from -10% in the previous quarter to -7.3%  in the first quarter of 2017,” he said.

However, viewing the first quarter decline in the average time on the market along with certain other indicators, a picture of early market strengthening does appear to be emerging, the analyst said.

There has also been a two-quarter rise in the percentage of estate agents citing residential stock constraints, suggesting a tightening in residential supply relative to demand.

“Against this recent economic backdrop, it is conceivable that we could see the housing market shift back towards equilibrium, or alternatively put shift back towards greater price realism relative to prevailing demand, and that this should be witnessed in some decline in the average time of homes on the market prior to sale,” Loos said.

He noted however, that key to this market strengthening, is how political and policy events unfold during 2017 in the run up to the December ruling party elective conference.

He said that political volatility, and the ever present threat of ratings downgrades for South Africa, can change an ever improving economic scenario very quickly, should it exert significant downward pressure on investor confidence and the rand.

“A sharply weaker rand, should it happen, could mean a resumption of interest rate hiking due to an increase in imported price inflation,” Loos said.


Read: More SA properties are being sold for less than their previous purchase price

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Most SA home sellers are being forced to drop their asking price to make the sale