Residential activity rating strengthens in the first quarter of 2018

by JOHN LOOS

There have been signs of significantly improved economy-wide sentiment early in 2018, an improvement that many link to the change in the ruling party’s leadership, which translated into a change in the country’s president too.

This has been reflected in a significantly stronger rand, as well as a first quarter jump in business confidence.

This apparently political change-influenced sentiment improvement assists an already-improving economy, improvement which was seen through last year in the form of gradually strengthening quarterly year on year economic growth, and a rising leading business cycle indicator which pointed to possible further strengthening in 2018.

In our first quarter 2018 FNB Estate Agent Survey, we also begin to see indications of improved sentiment, which could be further signs of both economic and housing market strengthening to come in the near term.

Certain of our residential indicators are leading ones not only regarding the housing market’s future performance, but also with regard to the broader economy and business cycle.

Encouragingly, the first quarter FNB Estate Agent Survey appears to point to the likelihood of an improved economy in the near term, with not only the FNB Residential Activity Rating moving higher, but also an improvement in certain indicators of sentiment.

In the survey, the sample of agents questioned is asked to rate activity levels in their areas on a scale of one to 10, with 10 being a very strong level of activity and one being very weak.

From this, we have compiled the FNB Residential Market Activity Rating for South Africa, and more recently for Namibia too, and this activity rating has shown itself to be a useful leading economic indicator much of the time.

After a three-quarter decline up until the final quarter of 2017, the first quarter of 2018 showed a significant increase in the activity rating, both on an actual as well as a seasonally-adjusted basis.

From a multi-year low of 5.29 (5.40 on a seasonally-adjusted basis) in the fourth quarter of 2017, the activity rating rose significantly to 6.18 in the first quarter of 2018 – and to 5.79 on a seasonally-adjusted basis.

This renewed quarter on quarter rise meant that, on a year on year basis, the indicator remained in negative rate of change territory, to the tune of -2.06%. However, this year on year rate of decline is significantly diminished from the previous quarter’s -9.0%.

The direction in the rate of change in the residential activity rating correlates reasonably, though not perfectly, with direction in the rate of change of the SARB leading business cycle indicator, sometimes even leading the SARB leading indicator with directional changes.

The sudden improvement in the activity rating in the first quarter could thus point to a near term strengthening in economic growth to come.

This would be supportive of the Firstrand improved Real GDP (Gross Domestic Product) forecast of 1.8% for 2018, up from 1.3% in 2017.

Key to an improvement in economic growth performance in 2018 could be a significant improvement in general sentiment – in the business sector and among consumers. Weak sentiment in both groups has been a major drag on investment and economic performance in recent years.

In the survey, we ask agents for their near-term expectations of residential activity. This answer is of limited use due to seasonal factors in the sector. However, as a follow up we ask them to cite reasons for why they expect what they expect with regard to activity levels.

They are free to provide any influencing factors that they wish. Insightful is the fact that 19% of first quarter 2018 respondents cited economic stress/pessimism as a perceived factor, which represents a significant drop from 36.7% in the previous quarter and as many as 51.3% as at the second quarter of 2017. This latest percentage thus represents a significant improvement.

By comparison, those that cite positive consumer sentiment as a factor are now a far greater 56.7% of survey respondents, a percentage which rose sharply from a mere 6% in the final quarter of 2017.

Delving a little deeper into the detail of the first quarter survey results, we find that 39.3% of respondents pointed to the change in the country’s president as the factor behind their perceiving positive consumer sentiment. Therefore, the majority of the group pointing towards such positive consumer sentiment did so as a result of the country’s leadership change.

Gauteng appears to be the region where housing demand has improved early in 2018 most noticeably, leading to a noticeable rise in its estate agent activity rating, from 5.3 in the previous quarter to 6.84 in the first quarter 2018 survey.

We have touted Gauteng as the 2018 outperformer, due to its superior housing affordability (house prices relative to income), something that has for a while been reflected in very strong first time buying levels in that province as first time buyers with their financial constraints are more sensitive to home affordability levels.

By comparison, in the three major coastal metros – Cape Town, Ethekwini and Nelson Mandela Bay – aggregated activity rating declined slightly from 5.28 previous to 5.21 in the first quarter of 2018.

Namibia, although slightly stronger in the first quarter of this year, remains the weak region in the rand area, with a lowly 4.5 activity rating in the first quarter of 2018.

Namibia has been experiencing a recession through much of 2017, while its housing market has run far stronger in recent years than that of South Africa, creating a significantly greater home affordability challenge in that country. These two factors are believed to be largely behind its low activity rating in recent times.

Viewing the four different income areas – as self-defined by the agents – both South African and Namibia have their strongest activity ratings at the lower income area end of the area spectrum.

This has come to be expected in recent years, given a weak economic growth rate constraining household income growth, rising personal tax rates biased against the higher income groups, and with sharp increases in municipal rates and tariff bills which also work more against the higher end. All of these factors have caused a search for relative home affordability, resulting in a stronger performance at the lower end of the market.

In short, given the generally good correlation between the FNB Residential Activity Rating and the leading business cycle indicators for South Africa, a seasonally-adjusted quarter on quarter rise in this activity rating points towards a stronger housing market performance to come in the near term, and to a possible strengthening in economic growth.

Of the estate agents surveyed, there has been a major increase in the percentage of them experiencing positive consumer sentiment, and a significant decline in those perceiving economic stress/general pessimism in the market, with a sizeable portion of agents believing that the improvement in sentiment was due to the recent political leadership change in the country.

The rise in the National FNB Residential Activity Rating in the first quarter was largely driven by a rise in the activity rating in Gauteng, with a slight decline in aggregate activity rating in the major coastal metros of Ethekwini, Cape Town and Nelson Mandela Bay. This is very much in line with our expectation that Gauteng’s housing market is set to be the top performer in 2018.

John Loos is the household and property sector strategist at FNB Home Loans.