Smaller is better, but even the smaller home market shows signs of slowing

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

We have for some time been saying that smaller is better when it comes to home buying, but that doesn’t mean the smaller home market isn’t slowing down.

All of the factors we have periodically claimed are more in favour of small home buying remain relevant: the economic environment remains weak, causing weak household income growth, and interest rates have risen mildly in recent years.

Effective personal tax rates continue to rise, and municipal rates and tariff increases outpace general inflation. And, of course, there is the sliding scale for transfer duties, putting more expensing homes, which are on average larger, into higher transfer duty brackets. So, not surprisingly, the smaller home market continued to outperform the medium and large-sized segments in the third quarter.

However, all of this does not prevent the smaller-sized market from going into a slowdown too, and indeed, while it remains the relative best performer of the three size segments, it has shown signs of slowing of late.

In our FNB House Price Indices, the three size categories are the small homes of 20 to 80m2, medium homes of 80 to 230m2, and the large homes of 230 to 800m2.

The house price inflation rates for the three categories continue to differ noticeably. The small home category’s average price is R616 180 and price inflation was the highest of the three segments, at 8.1 percent  year-on-year in the third quarter. However, this represents a slowing in growth from the previous quarter’s revised rate of 11.7 percent and the first quarter’s high of 11.9 percent.

Next was the medium home category with an average price of R1.111m and 5.8 percent year-on-year price inflation, which reflects a slight de-celeration from 6.6 percent in the second quarter and 7.5 percent in the first quarter.

The large home category with an average price of R1.958m may be stabilising a bit at very weak levels, having seen its inflation rate accelerate mildly from 1 percent year-on-year in the first quarter to 3 percent by the third quarter. At such a low price inflation rate, however, we cannot yet call this a strengthening, as the 3 percent rate remains significantly negative in real terms, when adjusting for general inflation, as measured by the CPI (Consumer Price Index), of nearer to 6 percent.

The small home category has “out-inflated” the other two categories for most of the time from 2010. And if one evaluates the performance of the three size categories’ price indices since even further back from the first quarter of 2001, a more than 15 year period, we see that the small segment has outperformed the other two on a cumulative inflation basis.

The smaller house price index has inflated by 372.9 percent since the first quarter of 2001. The medium house index is not too far behind with 351.9 percent cumulative inflation over the same period. But the large home segment has underperformed by a significant margin, especially since around 2011, cumulatively inflating by a significantly lesser 285.3 percent since early-2001.

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