By John Loos, Household and Property Sector Strategist at First National Bank
The 5% FNB House Price Index inflation rate suggests no apparent need for “first-time buyer panic” at present. But there is a need for first-time buyer caution, and perhaps a little less obsession with home ownership.
South Africa’s “obsession” with home ownership has the potential to be a key driver of major residential market “overshoots”, and we believe that it was exactly that back in the boom years preceding 2008.
A strong belief by many is that one must own a home, and that the rental option is “not cool”. We believe this to be a key cause of buyer panic. Buyer Panic can increase during times of strong house price inflation, when aspirant home owners begin to believe that “if I don’t buy now I won’t be able to afford a home in future”. During the 2004/5 period, where average house price inflation peaked at extreme levels above 30%, such panic was to be expected in a country where home ownership is such a high priority. Should our society have possessed a different mindset, perhaps one where the rental option was more popular, home buying demand may have faded earlier in the price boom as affordability deteriorated, causing the boom itself to fizzle out earlier.
A greater willingness to “trade” the ownership option for the rental option depending on home affordability fluctuations may thus help in smoothing out the residential cycle somewhat, although it would be unrealistic to expect that we could entirely get away from this being a cyclical market.
Culture of home ownership is deep rooted in SA
But perhaps more importantly, “dumbing down” the strong “culture of home ownership” a little may also reduce the risk of first-time buyers over-committing financially and experiencing financial stress later.
The reality is that a home is for many of us the biggest single financial commitment that we ever make. Not only does it bring about a debt repayment commitment for many, but with it comes home insurance costs, security costs, maintenance costs, and rapidly increasing municipal rates and utilities tariff bills. It goes even further, however, to the desire to fully furnish a home, meaning that as a rule of thumb, the larger the home, the higher the furniture and fittings costs, often funded by unsecured debt.
Recently, we have been surprised at our FNB Estate Agent Survey’s perceptions of the level of first-time buyer panic. The agents surveyed over the past five quarters, since we started this survey question, perceive around one third of first-time buyers to be “suffering” from buyer panic. Although we suspect that it would have been far higher back in the boom years, this percentage still appears significant in a residential market that currently experiences mediocre house price inflation of around 5%, not far above consumer price inflation.
Yes, the culture of home ownership appears to be deep rooted one in South Africa.
A second statistic which remains of concern to us, and which we believe to be in part related to the strong culture of home ownership and periodic bouts of buyer panic, also emanates from our Estate Agent Survey. It is the estimated percentage of home sellers selling in order to downscale due to financial pressure.
Although this percentage has come down dramatically from a 34% high, reached in 2009, to 12% in the first-quarter 2015 survey, we view 12% of total sellers to still be a significant number given that interest rates have been at multi-decade lows in recent years. Things couldn’t have got too much better for this heavily credit-dependent market in recent years, and yet still we see a noticeable percentage of sellers being ones that have become financially “over-committed” for various reasons, and are having to downscale. And this downscaling process is a costly one, given the high cost of the residential transaction (and the costs and disruption associated with the physical move).
Considerations for aspirant first-time home buyers:
- Gain control of your emotions when considering the purchase of a residential property. Home ownership is nice, but it isn’t essential. South Africa has a well-developed rental market, and it is important that you are financially ready for the myriad of costs associated with owning a home.
- Home ownership is not an automatic “wealth creator”. It can be, especially if it is an appropriately priced property for buy-to-let purposes. But for many, the home can be a key cause of financial stress, ultimately leading to a costly “offloading” of the property.
- Maintenance costs on a home can often be erratic and unpredictable. Many of these are the responsibility of the landlord when one rents, but become the owner’s responsibility once one buys. Unpredictable cost fluctuations are often financially stressful for a young first-time buyer still with a low level of spare income.
- While home prices are not rising fast, municipal rates and tariff bills are rising faster. The CPI for “water and other services”, which includes municipal rates, is rising at a national average of 8.5% year-on-year, well above overall CPI inflation, and while the electricity CPI was recently rising at only 7%, we know that further sharp electricity tariff hikes have been applied for.
In short, “buyer panic” is a phenomenon which often grips first-time buyers in SA due to the strong desire to own a home, and it can lead to hasty buying decisions which later cost some of us dearly. The currently mediocre house price inflation environment should reduce the need for “buyer panic”.
More important is to consider the rising costs associated with home ownership, and the possibility of further such cost increases especially in the area of interest rates on debt as well as rates and tariff hikes.
These cost increases don’t necessarily mean that you shouldn’t buy a home. But they do suggest that home buyers should buy well within their means, to be able to absorb such potential cost increases, or that they should possibly wait it out until such time as they are financially strong enough. The reality is that a significant number of homeowners have to sell and downscale later on, a costly exercise both on the wallet as well as sometimes on one’s morale.