The 2nd quarter Consumer Confidence Index reading of -15, was the lowest level in this index since the 4th quarter of the year 2000, and represented a significant drop from the prior quarter’s reading .
The magnitude of the drop does not necessarily mean that there is a crisis in the making. It does however indicate that the Household Sector has some concerns and this could have an impact on the residential property market.
•* Weaker Consumer Confidence appears to be causing a more conservative approach to household finances*
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Consumers often have concerns, which can weigh on their confidence, but they don’t necessarily “shut up shop” on a large scale unless the actual economic outcome is very weak.
Certain behavioural patterns in the Residential Property Market point to a more conservative approach to spending.
In FNB Estate Agent Surveys, estimates of 1st time buyer levels as a percentage of total buying have receded in recent quarters. This recent decline in the 1st time buyer percentage suggests that a portion of them are becoming more cautious as the economy slows and the SARB (Reserve Bank) continually warns of possible further interest rate hiking.
On the home selling side, FNB has also seen a noticeable decline in the percentage of sellers selling their homes in order to upgrade, suggesting more staying put for the time being. And the downscaling to smaller homes by those ageing home owners that no longer need their “large” homes, due to “life stage”, also smacks of greater financial conservatism.
Amongst those sellers selling in order to downscale due to financial pressure, the estate agents believe that as of late a greater percentage will go the route of renting, on average the cheaper option to “buying down”.
*The main concerns amongst consumers*
Wariness with regard to future interest rate hiking, with the SARB repeatedly warning very publicly of the need to “normalize” interest rates upward.
A renewed rise in Consumer Price (CPI) Inflation following a temporary dip early in 2015 due to last year’s oil price drop.
Rising tax and tariff rates, ranging from Personal tax increases to Municipal rates and utilities tariffs and in Gauteng the additional burden of Etolls. There is also regular speculation of further tax hikes, including the possibility of a VAT rate hike.
Widespread publicity regarding an economy with major structural constraints and unable to grow significantly and create jobs. The economy is currently stuck in the 1-2% growth range. A notable structural constraint is that of electricity supply, felt directly by households through regular “load shedding”, and this may be a key driver of weakened sentiment.
Widespread evidence of broader problems with economic management that stretch beyond the electricity sector.
In such conditions, a more conservative financial approach is arguably appropriate, and should be seen as desirable.
• Little indication of rising financial stress yet
The FNB Estate Agent Survey data regarding the estimated percentage of sellers “selling in order to downscale due to financial pressure” has risen very slightly, from a low of 11% at the end of 2014 to 13% in the 2nd quarter 2015 survey, but this is not yet a meaningful movement, and is still below the 14% average for 2014. It is also still far below the estimated 34% high reached at the peak of financial stress in the 2nd quarter of 2009.
Expectation of the resumption of interest rate hiking by the SARB in the near term could, however, raise the levels of financial stress. How bad it could get depends in part on the pace and magnitude of interest rate hiking. However, it also depends on just how well the Household Sector prepares for this event through its more conservative financial approach.
• Consumer Confidence deterioration can lead to an intensification in the “skills drain”, but no strong signs of that yet
It is possible that the Consumer Confidence deterioration can in part be due to concerns that relate to the longer term future of South Africa. This is especially true when weakness is driven by events such as power supply issues, or large-scale and sometimes violent events such as major industrial action. Weakening Consumer Confidence can then coincide with an emigration surge.
Currently, one gets the feeling that “emigration talk” has become more common in an environment of rising social tensions and future political uncertainty.
In the FNB Estate Agent Survey estimates of the reasons for selling homes, an average percentage of 3.8% of total selling was estimated to be in order to emigrate. This represents a mild rise from a 2% low in the final quarter of 2013 following a prior declining trend from 2009 to 2013.
While this small rise in percentage hints at higher levels of emigration, it is probably too small an increase and too early to draw hard and fast conclusions.
But it is conceivable that the recent dip in Consumer Confidence can be accompanied by heightened levels of emigration.
Conclusion
The drop in Consumer Confidence has brought about a more conservative approach to household finances. This is reflected in the residential property market by a decline in 1st time buyer and single buyer percentages, a drop in the level of upgrading to better homes and a rise in sellers downscaling due to life stage.
There isn’t a noticeable rise on financial stress levels but this could change when interest rates inevitably rise later in the year.
If confidence drops further, it could lead to an increase in emigration and this would be a key concern.