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Buy-to-let property buying slowing down

(by John Loos - household and property sector strategist at FNB Home Loans)

In the second quarter 2016 FNB Estate Agent Survey buy-to-let demand is perceived to be a little slower of late, along with moderating near term expectations among agents.

Simultaneously, though, the estimated pace of selling of investment properties remains low, suggesting still-low levels of financial stress or pressure in this market.

A lack of exuberance in this market may become supportive of the rental market, constraining growth in supply of available homes for rental. This, coupled with our expectation of some increase in demand for homes to rent, could contribute to some strengthening in the rental market in the near term.

In addition, an already-moderate pace of buy-to-let buying can limit the downside risks to the residential market when the economy is on a deteriorating path, because this form of residential demand can weaken more sharply when economic downturns occur.

The second quarter 2016 FNB Estate Agent Survey once again pointed to little excitement or exuberance in the level of buy-to-let home buying, and even a possible decline in significance from already-modest levels.

As a percentage of total home buying, buy-to-let purchases are estimated by survey respondents to have moved lower, from 9.1 percent in the previous quarter to 7.6 percent in the second quarter of 2016.

This estimate continues a lengthy period of single-digit percentage estimates for buy-to-let buying.

The recent estimates of buy-to-let levels in SA remain moderate by comparison to last decade’s boom period, where they were estimated as high as around 25 percent of total home buying at a stage back in 2004. Admittedly, it is difficult to ascertain what would be a normal percentage in weak economic times such as the present, because we don’t have a survey history dating back to previous super-cycle periods of economic weakness before last decade’s boom period.

Examining potential drivers of buy-to-let buying, it is realistic to expect moderate levels to continue, and even some further slowing. Of course, buy-to-let buying along with leisure home buying is a non-essential purchase, and can be expected to be constrained in times of economic weakness and rising interest rates.

One of the big attractions of buy-to-let buying for many is the expected capital growth that can be achieved, but house price growth generally remains benign at present. For those more focused on the rental income stream, there has been some yield compression since 2014 too, also reducing buy-to-let attractiveness mildly in recent years.

The StatsSA CPI for actual rentals has seen its inflation rate accelerate mildly since around 2012, but at 5.18 percent year-on-year, this rental inflation has not yet overtaken average house price inflation. So, as at the first quarter of this year we still estimated the average yield on residential property to be on its gradual declining trend.

From a peak of 8.58 percent at the end of 2013, our revised national average gross yield has declined to 8.34 by the first quarter of 2016, compressed by a period of relative home buying market strength in recent years, contributing to a less attractive buy-to-let opportunity for those focused on yields.

We have created an additional measure with which to measure secondary property buying, using Deeds Office data for transactions by individuals (natural persons). Here, we estimate the number of secondary properties owned by individuals (that is, where someone owns more than one property) to be about 16.2 percent of all the properties identified. This ratio has flattened out in recent years, after a noticeable boom time rise during last decade, thus also pointing to little excitement in the second home buying market.

Important to understand is that secondary properties includes those for purposes other than buy-to-let buying, including purchases for use by relatives or for leisure purposes.

However, one would expect that holiday home buying, like buy-to-let buying, would probably also be at moderate levels in the currently weak economic times.

While investment property buying levels are seen as moderate, the level of selling of such properties is also perceived as low.

We ask agents to estimate the portion of all properties sold that are believed to be investment properties being sold due to owners not earning the type of investment income that they had anticipated. For smoothing purposes, we use a four-quarter moving average percentage, and find the average for the four quarters up to the second quarter of 2016 to be 3.25 percent, unchanged from the prior quarter. This percentage remains relatively low, having been as high as 10.25 percent at a stage of 2010.

In short, therefore, though buy-to-let buying levels are not seen to be setting the world alight at present, buy-to-let property selling appears even more modest, which is one indication of still little in the way of financial stress in this market.

In the second quarter 2016 survey, the agents surveyed appear to have slightly less optimistic expectations regarding levels of buy-to-let home buying growth in the near term, compared with prior quarters.

In our survey, we ask them to state whether they expect buy-to-let demand to increase (which gets a rating of +1), stay the same (rated as zero) or decline (rates as -1).

The FNB buy-to-let market confidence indicator is the weighted average of these different expectations. The second quarter 2016 survey came out at a slightly lower level than the prior few quarters, at 0.07 (scale of 1 to -1), down from 0.086 in the previous quarter.

The picture that emanates from the buy-to-let market is one of possible slowing demand, along with moderating near term expectations among agents. Simultaneously, though, the estimated pace of selling of investment properties remains low, suggesting still-low levels of financial stress or pressure in this market.

A lack of exuberance in this market is probably a positive for the rental market, constraining growth in supply of available homes for rental. This, coupled with our expectation of some increase in demand for homes to rent, could contribute to some strengthening in the rental market in near term.

In addition, an already-moderate pace of buy-to-let buying, can limit the downside risks to the residential market when the economy is on a deteriorating path, because this form of residential demand can weaken more sharply when economic downturns occur.


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