Agents hint at fewer foreign home buyers

The FNB Estate Agent Survey has started to hint at a slowdown in the prominence of foreigner buying of domestic residential property.

The drivers of such a slowing may be threefold. First, a reasonably well-behaved rand in recent times did lead to a bout of house price inflation of domestic homes in certain foreign currency-denominated terms, and a lack of further South African housing affordability improvement in others.

Second, residential property’s global popularity as an asset class may just have cooled off mildly in recent times. Third, it is not inconceivable that a deterioration in domestic economic performance along with heightened social tensions could cause greater foreign residential investor caution.

In the survey, we ask respondents to provide an estimate of the percentage of total home buyers that are foreigners.

Using a two-quarter moving average for smoothing purposes, the estimated percentage of foreign buyers declined from 5.5 percent in the preceding two quarters to 4 percent as at the second quarter of 2015.

This decline in the foreign buyer percentage in the first half of 2015 follows a prior broad rising trend that lasted from a low of 2 percent late in 2010 to a 5.5 percent high by the end of 2014.

Viewing foreign buying in a different way, we ask agents if they have experienced foreign buyer numbers to have increased, decreased or remained the same. In this question, they have five answer options, “There is a lot more foreign buying”, “a little more foreign buying”, the same amount of foreign buying”, a little less foreign buying”, or a “lot less foreign buying”.

When using this questioning, a higher percentage of agents still see an increase in foreign buyer numbers compared to those seeing a decline. However, the percentage of agents seeing an increase has declined over the past two quarters. In the second quarter 2015 survey, 1 percent of respondents perceived “a lot more foreign buyers”, 13 percent “a little more foreign buyers”, 83 percent saw “unchanged foreign buyer levels”, 2 percent indicated a “little less foreign buyers” and 1 percent a “lot less foreign buyers”.

This distribution is a slight deterioration on the prior quarter, where 3 percent of respondents claimed a “lot more foreign buyers” and 13 percent a “little more”, and is the second successive quarter of such deterioration. Taking the quarterly distributions, we construct our foreign home buying confidence index on a scale of -2 to 2, where +2 would imply 100 percent of respondents claiming a “lot more” foreign buyers and -2 meaning a 100 percent saying a “lot less”, with all the other possible distributions somewhere in between. This index’s value has declined for two successive quarters, from a high of 0.17 at the end of 2014 to 0.11 by the second quarter of 2015.

Therefore, both lines of questioning regarding foreign home buying point to at least a slowing in the pace of growth in foreign buyer numbers, although it is difficult to draw conclusions from the survey as to whether there is yet an absolute decline in their overall number. We believe that there are two main potential contributing forces to this slowing, and a possible third one.

One, the rand’s period of relative stability. During the first half of 2015, the rand has been relatively stable, showing very little in the way of year-on-year depreciation or appreciation. The trade-weighted rand index started the year with some mild year-on-year strengthening, reaching +4 percent in February. This had turned to a mild deprecation of -4 percent year-on-year in June.

These fluctuations are small in the grander scheme of things, and have contributed to some increase in house prices for certain regions’ buyers, notably those from the Eurozone.

The euro-denominated FNB House Price Index suggests that foreign buyers using euros were facing a 10.6 percent average house price inflation rate on SA residential property. This index’s inflation rate has measured a cumulative 16.1 percent since February 2014.

The UK pound-denominated FNB House Price Index, by comparison, has risen cumulatively by a lesser +1.4 percent over the same period, and the US dollar-denominated FNB House Price Index has shown a cumulative decline of -4.6 percent since February 2014.

The performance of the rand thus presents a mixed bag, implying significant cost increases in SA property for certain regions’ buyers such as those from the Euro area, and has at least slowed the pace of affordability improvement for others, such as pound and dollar buyers, since prior years.

Second, slowing in the rate of increase in popularity of residential property as a global asset class. The factor that we believe to be more significant in driving the pace of foreign home buying in South Africa, however, is the performance of residential property as an asset class globally. This determines its popularity to a certain extent, while also being a reflection of its popularity.

The big monetary and fiscal stimulus since around the time of last decade’s financial crisis has been gradually fading, and the global economy’s growth is a little slower these days when compared to the post-recession recovery period around 2010/11.

Given that property largely reflects economic trends, it is not surprising that global property prices are not inflating as rapidly on average as they were back around late-2013. The Knight Frank Global House Price Index inflation rate had slowed to 0.3 percent year-on-year by the first quarter of 2015, down from a high of 6.3 percent in the fourth quarter of 2013.

A global economy off the boil, and a global property market off the boil, are believed to have diminished the growth in popularity of residential property as an asset class, and this could impact negatively on the level of foreign property buying, or at least the growth therein, in the near term.

Third, investor sentiment towards South Africa. It is also possible that SA’s stagnating economic performance, along with heightened social tensions, may encourage a more cautious approach by certain foreigners towards residential investment in SA.

Fourth, African continent buying. Of interest is the seeming gradual change in the key sources of foreign buying over the longer term, with more coming from the rest of the African continent in recent years.

Foreign buying of SA property by African continent buyers remained significant in the first half of 2015, estimated at 20.5 percent of total foreign buying.

In conclusion, domestic residential property continues to appear cheap to foreign buyers, if one compares it to levels back around 2011 before the multi-year slide. In US dollar terms the FNB House Price Index is -29.4 percent lower than in July 2011, -10.2 percent down in euro terms, and -26.8 percent down in UK pound terms.

However, foreign currency-denominated SA house price decline slowed significantly in 2015 due to recent a period of relative rand stability, and actually even showed some significant increase in euro terms.

This period of relative rand stability may be a contributing factor to slowing growth in foreign home buyer activity.

However, we believe the performance of residential property globally influences its popularity as an asset class, and that such fluctuations in its popularity are more of an influence on foreign buyer levels in SA than are the fluctuations in the rand.

Our arguments are based on the history of recent years. In the boom market of 2005, estimated foreigner buying was as high as 7 percent of total local home buying despite rand strength making local property relatively expensive for foreigners at that time. Property back then was an extremely popular asset class. We believe this popularity was the key driver at that time. Conversely, we believe that a slower pace of improvement in global property markets on average, which is in part reflective of a slower global economic growth rate since a few years ago, may be a key contributor to a slower pace of increase in foreigner home buying in SA.

A further potential contributing factor may be South Africa’s own weakened economic performance, along with heightened social tensions, which may cause concern among certain residential investors.

After early hints of weakening, however, it is a little soon to draw hard conclusions as to whether this recent survey indication of slowing pace of foreign buying will become a more pronounced trend.

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