Things are beginning to change in the property market and while it may be too early to say if the shift will have a long-term effect, it could mean that sellers are in for a slightly bumpier ride.
Number of visitors to show houses drops
John Loos, a household and property sector strategist with FNB, notes in the latest FNB Estate Agent Survey that there has been a drop in the number of average estimated visitors to show houses, down from 11.6 to 9.4 in the second quarter of 2016. While this may not seem like much of a difference, the cumulative decline in recent years has become considerable, given that the high during the second quarter of 2013 was 16.69.
Time on market increases
There has also been a noticeable increase in the estimated average time a property stays on the market. This has risen from 11 weeks and one day to 13 weeks and four days. “It is too early to draw conclusions after only one quarter, and as such an average time remains a fairly solid one, this increase may hint at a near term shift in the market away from equilibrium,” say Loos.
Affordability deteriorates
The report notes agents’ perception of housing affordability has deteriorated mildly, with as many as 31 percent saying that “income levels have dropped far behind house prices”. This is compared to 11% back in the third quarter of 2014.
More sellers drop asking price
To compound matters, agents have reported a further slight increase in the percentage of sellers having to drop their asking price, from 88 percent in the first three months of this year to 92 percent in the second quarter. Although this is a marginal difference, the number is significantly higher than the 78 percent recorded during the second quarter of 2014. The average percentage asking price drop averaged out at -9% which although slightly more than the -8% recorded in the previous quarter, was unchanged from the second quarter a year ago.
“It is important to understand that due to significant resistance by sellers to house price declines, in times of economic and residential demand slowdown the residential market often moves away from market equilibrium price,” says Loos.
"Therefore, the average market house price level as depicted by a house price index is not necessarily the “market equilibrium” price."
He says there are various reasons for very strong resistance to dropping prices in order to make a sale. “Home sellers, for various reasons, are reluctant to sell for less than their purchase price, and often resist selling at a price lower than their often “inflated” idea of what the property is worth.”
This can be due to a number of reasons, including the amount of mortgage debt that needs to be settled, or a belief that house prices never go down. Unfortunately, he notes, the ‘downward resistance’ can also be the result of competition among estate agents who quote the highest selling price in the hopes of securing that all-important sales mandate.
But perhaps one of the biggest driving forces behind downward resistance is a miscalculation of the ‘holding costs’ should a property remain on the market for an extended period, coupled with an ‘inflation illusion. In other words if a seller has to wait for a year to sell his home due to an initially unrealistic asking price, it means that he has effectively dropped the asking price in real terms over that period, often without realising it.
We’ve seen sufficient evidence of a broad economic weakening over the past four years or so, followed by the start of a rising interest rate trend from early 2014.
“We’ve seen sufficient evidence of a broad economic weakening over the past four years or so, followed by the start of a rising interest rate trend from early 2014,” says Loos. “And the FNB Estate Agent Survey has pointed to a broad slowing in residential demand from around 2014 (ignoring a temporary demand strengthening in early 2016), following the start of gradual interest rate hiking early in that year.”
By all accounts it looks as though homeowners are going to find it marginally more difficult to sell. Serious sellers may have to consider accepting slightly less than they anticipated and those who have been ‘testing’ the market may well have to do some hard thinking and price their homes to sell.