First time home buying slowed when expressed as a percentage of total home buying Q12016

Posted On Friday, 08 April 2016 10:23 Published by
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According to the FNB Estate Agent Survey, for the 1st quarter of 2016, 1st time home buying slowed when expressed as a percentage of total home buying.

John_LoosFNB

This source of residential demand remains a significant source of housing demand, accounting for an estimated 21% of total home buying, but was down on the prior quarter’s 26%.  While the percentage estimate can be volatile from quarter to quarter, recent quarter’s estimates have remained below the multi-year high point of 28%, reached in the 2nd quarter of 2014, and the smoothed trendline has recently moved lower.

This percentage nevertheless remains solid compared to the 12% low reached around recession time back in 2008. In a follow up question, we attempt to ascertain the agents’ perceptions regarding the level of “1st time buyer panic” in the market. 1st time buyer panic refers to when 1st time buyers become concerned with house price inflation, worrying that “if they don’t buy now they will never be able to afford a home in future”.

This is important, because widespread buyer panic can cause a housing market’s price levels to “overshoot”, contributing strongly at times to house price “bubbles”.

The sample of agents’ surveyed has pointed to a very significant percentage of 1st time buyers suffering from “buyer panic” in recent surveys. However, this percentage has begun to subside over the last 2 quarters, from a high of 54% in the 3rd quarter of 2015 to 48% of 1st time buyers by the 1st quarter of 2016.

This should be expected, given the signs of market softening through 2015, a softer market with lower average house price inflation being likely to cause less panic. As it was, the relatively high 1st Time Buyer Panic percentages of recent quarters probably gave an inflated impression of how widespread this problem was, because it must be borne in mind that ever since the end of the pre-2008 residential boom period, overall transaction volumes levels as well as 1st time buying transaction levels have been relatively low. 

AGE GROUP BUYING

Overall young buyer transaction volumes remain modest Using Deeds Data, we identify property transactions by “Individuals”, or “Natural Persons” in Deeds Office language. On a 3-month moving average basis (for smoothing purposes), we identified an average 24,016 such transactions per month for the 3 months up to December 2016. This level is only around 39% of the boom time peak volumes late in 2003. 

Therefore, this translates into a far lower absolute number of young buyers, and thus of 1st time buyers today compared to back in the boom times, even though as a percentage of total volumes they may look reasonably strong. Examining the total number of individual buyers below the age of 40, of which a sizeable portion would be 1st time buyers. Their numbers by late 2015 were only about 34% of that late-2013 high point. One must therefore not view only the percentages of totals.

That could be misleading. Given low overall volumes of transaction as well as the 1st time buyer component these days, we do not perceive 1st time buyer panic to be a widespread issue, despite perhaps reaching a significant percentage of what is transacted. Much of this weakness in transaction volumes, that has persisted even despite some small improvement following the end of the 2008/9 recession, has to do with affordability matters, after a massive house price boom last decade.

High price and transaction costs usually mean high overall total transaction values but low transaction volumes.

High real property values keep the average buying age relatively high Not only are 1st time buyers likely to be far less in number today than back in the pre-2008 boom (despite their percentage of total buying recently having been similar to the percentage back around 2003/4), but on average they are probably significantly older than back then. Young aspirant home buyers are highly sensitive to economic changes and affordability changes.

They are also driven by sentiment, and are highly sensitive to changes in bank lending criteria, being heavily dependent on credit as a group. For many, the response to a deterioration in home affordability, brought about either by rising real home values or by interest rates, or a weaker economy with slower job creation, is to wait for longer to buy a home.

Indeed, even in recent times this appears to have been the case. A relatively strong market period through 2012 to 2014 appeared to contribute to a decline in the percentage of individual property buyers between the age of 20 and 29, from 16.34% of total buyers in the 3rd quarter of 2011 to 13.63% in the final quarter of 2015.

 This percentage is now sharply down on last decade’s 20.81% high of February 2002. At that stage, real house prices were far lower than today. And the result is that the average age of individual property buyers of late is near to 44 years (43.82 years old as at February 2016), which represents a significant rise from the 40.65 year estimated at the end of 2007, right at the end of the boom period.  The average home buyer age for 2015 rose very slightly, from 43.7 years in 2014 to 43.8 years.

CONCLUSION

The FNB Estate Agent Survey has begun to suggest a decline in the phenomenon of 1st Time Buyer “Panic”, which may not only be reflected in the agent percentage estimate of the prevalence of such panic, but also in a decline in the 1st Time Buyer percentage.

But while both the percentage estimate of 1st Time Buyer Panic as well as recent 1st Time Buyer percentage estimates have been fairly high in recent quarters, we have not believed Buyer Panic to be a major problem, because in overall transaction volume numbers, both the overall market and 1st time buyer total volumes remain very low compared with the boom times prior to 2008.

In the near term, a slow economy, rising interest rates and a slowing residential market, are expected to lead to further broad slowing in 1st time buying both as a percentage of total buying and in total volume terms, as well as leading to a further rise in the average age of home buyer. 1st Time Buyer Panic, too, is expected to diminish in significance.

This is normal in toughening economic and interest rate times, with 1st time buyers normally being more cyclical as a group than the overall market, waiting on the sidelines in larger numbers in the tougher times, and growing in number more strongly than the repeat buyer group as times improve. 

 

Last modified on Friday, 08 April 2016 10:46

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