Sectional title housing market segment still outperforms full title segment, but both cooling

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

Sectional title homes have seen a long term rise in prominence in South Africa’s property trade, driven by mounting urban land and infrastructure scarcity, which requires a “drive” towards smaller average properties as we look to utilise land and infrastructure more economically.

But these long term structural changes don’t exempt it from shorter term cyclical fluctuations. And indeed, as a cyclical slowdown plays out, both the sectional and full title segments have recently found themselves softening.

According to deeds office data the volume and value of sectional title transactions by natural persons have increased in significance since 2010 after a 2008/9 recession dip. Volumes rose to 29.94 percent of total property transactions by individuals by the third quarter of 2016, from a cyclical low of 23.58 percent in the third quarter of 2010.

The relative recovery in sectional title transaction sales more or less followed a post-recession recovery in first time buying levels from around 2010/11, with the highly cyclical first time buyers believed to typically be a significant source of demand for smaller sectional title homes.

This period of relatively strong sectional title demand post-2010 has contributed to the segment’s average house price inflation catching up with the full title average, and even marginally exceeding it for much of the time from 2012 onward.

This, however, may have been changing in recent times, with the highly cyclical and interest rate-sensitive first time buyer percentage having fallen back from an early-2014 high of 28 percent of total home buying, to 18 percent by the third quarter of 2016.

And so we have seen a hint of a move towards flattening out in the trend in sectional title transaction volumes’ share of total transactions since 2015, and sectional title volume growth has been a bit slower than that of full title in recent quarters.

In both the full title and sectional title segments, it is very clear that smaller is still better when one compares the relative strength of the various sub-segments, although all have been slowing.

The smallest sectional title sub-segment – with fewer than two bedrooms – still showed the strongest price inflation of 9.8 percent in the third quarter. Significantly behind was the two-bedroom sub-segment with 6.5 percent price growth, and the largest three-bedroom and more category was the slowest sub-segment with 5.3 percent average price growth.

In the full title segment, the same relative picture emerges. The two-bedrooms and less category showed the strongest price inflation to the tune of 6.4 percent in the third quarter. This was followed by the three-bedroom segment with 5.7 percent, and the largest four-bedroom and more segment showed the slowest price growth of 2.6 percent.

Like the sectional title sub-segments, the three full title sub-segments had all shown some mild slowing in price growth of late.

In short, the sectional title segment is typically more cyclical than the full title market. This means that in tougher economic and interest rate times it can weaken a bit more significantly. Both segments have started to show signs of softening, but certain of the key performance indicators still put sectional title as mildly stronger than the full title segment. This comes through in the segment’s slightly superior house price inflation in the third quarter as well as its higher market strength index compared to that of full title.

However, we believe that first time and younger age group buyer demand is more important to the sectional title market than to the full title segment, and this group is seeing a decline in significance in the market of late. We therefore don’t believe that the sectional title segment will remain stronger then the full title market for too much longer, as both segments soften.

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