2016 may be the start of renewed slowing in the pace of new household formation

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

Smaller young age cohorts, a deteriorating employment situation, and the recent deterioration in home affordability may be starting to curb the pace of new household formation.

The odds appear stacked against first-time buyers in a variety of ways of late, and 2016 is proving to be the year in which the pace of growth in the formation of new households began to slow.

The FNB Estate Agent Survey estimates of first-time buyer levels expressed as a percentage of total home buying, have pointed to a noticeable slowdown in this source of residential demand through 2016.

From an estimated 26 percent in the final quarter of 2015, the first time buyer percentage has declined to 18 percent by the third quarter of 2016. This is significantly lower than the multi-year high of 28 percent reached in the second quarter of 2014.

This means that the average year-to-date first-time buyer percentage for 2016 is 20 percent, down from 2014’s 26.5 percent average.

The causes of this slowdown could be threefold.

First, the obvious factor would surely be a deterioration in home affordability in recent years, in part due to average house price growth having, until recently, exceeded per capita income growth, and partly due to mild interest rate hiking from early-2014 to early-2016.

This has caused some increase in our two main FNB home affordability indices. The first measure is the average house price/per capita disposable income ratio index, which has risen (deteriorated) by +4.8 percent from the second quarter of 2013 to the second quarter of 2016.

Add to that the past two years of interest rate hikes, and over the same period our second FNB home affordability index, the instalment value on a new 100 percent bond on the average priced house/per capita disposable income ratio index, has risen (deteriorated) by a more significant +20.6 percent over the same period.

The latter index is especially applicable to the highly credit-dependent first-time buyer group.

The second factor believed to be playing a key role in slowing the first time buyer levels is the deteriorating pace of employment creation, with entry into the housing market heavily dependent on income derived from successful entry into the labour market.

Economic growth has been broadly deteriorating since a post-recession high of 3.5 percent reached in the first quarter of 2011. Even with a second quarter 2016 improvement in real gross domestic product (GDP) growth after a first quarter contraction, the 0.6 percent year-on-year growth rate is more likely a job shedding pace of growth than a job creating one.

And after a few years of economic stagnation, in the first half of 2016, it appeared that the lagged negative impact on employment was beginning to emerge. For the first time since the final quarter of 2010, the year-on-year rate of change in total employment turned negative to the tune of -0.7 percent. With the pace of new entry into the labour market seemingly slowed, the pace of new entry into the housing market could be expected to follow suit.

But it may go a little further than the abovementioned affordability and economic factors, to demographic trends too. When examining the SA population estimates by age cohort for 2015 – using IHS-Globalinsight statistics – one sees a steadily increasing number of people per age cohort from the 873 058 estimate for the 70 to 74-year-old age group to the 6.659 million in the 25 to 29-year-old age cohort.

However, the younger 20 to 24-year-old age cohort shows a noticeably smaller 5.113 million number.

At some point, this smaller group may start, or have started, to affect the pace of entry into the housing market.

The demographics are, however, believed to be a minor contributor, with home affordability and job creation believed to be the most crucial.

Using our deeds data estimates of individual (natural persons) buyers of property by age group, indeed we see the most noticeable declining trend in the 20 to 29-year-old buyer group when expressed as a percentage of total buyers. This trend resumed around 2012 after a prior increase, and after peaking at 16.15 of total buyers, the number of 20 to 29-year-old buyers receded to 12.32 percent of total buyers for the three months to August 2016.

The impact of a deterioration in housing affordability in recent years, a weak economy all but halting job creation, and a smaller number of 20 to 24-year-olds compared to slightly older age cohorts, may be starting to cause a slowing in the pace of growth in new household formation in 2016.

According to IHS Globalinsight estimates, there had been a noticeable acceleration in growth in the number of SA households, from a 2011 low of 1.3 percent to 2.8 percent by 2015. This meant that the pace of household growth exceeded the estimated 1.5 percent population growth rate last year.

However, while we don’t yet have the population and household data for 2016, the more noticeable drop in first time home buying suggests that the pace of new household formation may be slowing, or soon about to slow. This may be backed up by estimates pointing to a further decline this year in the percentage of property buyers in their 20s.

Admittedly, the first time buying estimate does not provide the full picture on the rate of establishment of new households. New households can also be formed moving into the rental market. However, we would expect at least a portion of aspirant home buyers who delay their purchases to remain in their family home for longer, as tougher economic times play themselves out.

  Comment on this Article

  Please login to post comments

Post to my facebook wall
Characters remaining

    Latest Property News
    • 20 Apr 2018
      Whenever changes in the political ecosystem of a traditional property market create uncertainty, smart investors begin to look elsewhere for new opportunities. Property experts at IP Global have analysed the trends and crunched the numbers to find new markets to explore in Europe and the United States.
    • 20 Apr 2018
      Energy and water self-sufficiency are increasingly important factors in home buyers’ choice of property – especially in Cape Town where the extreme drought of the past few years has made municipal supply costly as well as uncertain.
    • 19 Apr 2018
      During the last decade, rampant development has progressively transformed Cape Town’s property landscape with densification being the order of the day, but there are still one or two hidden gems like Scarborough which have retained their original character, offering an inimitable lifestyle and an attractive investment opportunity.
    • 19 Apr 2018
      The rental market is a cut-throat sector of the real estate market that waits for nobody. According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, first-time renters need to be fully prepared before they even start the process of looking for a place to rent in order to avoid the disappointment of losing out on their ideal property.
    • 19 Apr 2018
      Choosing to buy your first home instead of continuing to rent is a big decision that will usually take some time to put into action, but the sooner you can save up a sizeable deposit, the closer you will be to reaching your goal.
    • 18 Apr 2018
      Selling your home is no small task and as you will quickly find out, there are a lot of misconceptions about the process. Gerhard van der Linde, Seeff's MD in Pretoria East lists the top 5 misconceptions when you are selling your home.
    • 18 Apr 2018
      The Cape Town municipality is now installing water-management devices at properties that have been non-compliant with the new level 5 water restrictions and there are talks of fines between R5,000 and R10,000 for households that use too much water.
    • 17 Apr 2018
      The recent interest rate cut has stoked the coals in the first-time buyer’s market. At least for the next two months until the next interest rate announcement, homeowners are guaranteed lower monthly instalments than in the previous quarter. But, is it wise to take out a 100% bond just to enter the property market while interest rates are low?
    Subscribe to the MyProperty Newsletter

    Last Name  
    Email Address  
    Email Frequency
    Share this Page

    For Sale Property
    Rental Property
    More Options
    Connect with us