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Monday Aug 29, 2016

Sectional-title transactions slow as first-time buyer pool shrinks

South Africa's mounting urban land and infrastructure scarcity has been key not only in a drive towards smaller average sized properties, but also towards a more significant portion of sectional title homes, as we look to utilise land and infrastructure more economically.

In an attempt to measure the progress of the sectional title segment's growth, we use deeds data transactions by individuals only (natural persons), which we believe should be a good proxy for residential transactions by individual households.

Here, we see the number of sectional title transactions having increased in significance since 2010 after a 2008/8 recession dip.

Smoothing the data with a six month moving average, we see sectional title transactions volume having risen to 29.9 percent of total property transactions by individuals by May, from a cyclical low of 23.7 percent late in 2010.

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

This period of relatively strong sectional title demand post-2010 contributed to the segment's average house price inflation catching up with the full title average, and even marginally exceeding it through 2014 and 2015.

This, however, may have been changing in recent times. In the second quarter of 2015, the FNB Sectional Title House Price Index saw a slightly slowing in year-on-year growth to 6.63 percent, from the previous quarter's 7 percent. By comparison, the FNB Full Title House Price Index recorded slightly higher year-on-year increase of 7.38 percent.

The differences are not large, but off a higher base it has been the sectional title index's price growth that has been slowing, and we believe this has much to do with a recent slowing in the significance of first time buying in the housing market, which we believe should impact more significantly on sectional title.

According to the FNB Estate Agent Survey, first time buying has declined in significance in recent times, from an estimated high of 28 percent of total home buying as at the second quarter of 2014 to 21 percent of total home buying by the second quarter of this year.

While still a relatively good percentage, first time buyers are more credit-dependent and thus interest rate-sensitive that repeat home buyers on average, and we believe that rising interest rates since early-2014 have been key in cooling off first time buyer levels mildly.

This, in turn, may have cooled sectional title demand just a bit more than that of full title.

Within both segments, it is very clear that smaller is better when you compare the relative strength of the various sub-segments.

The smallest sectional title subsegment - the fewer than two bedrooms segment - still showed strong double-digit price inflation to the tune of 13.7 percent in the second quarter of this year.

Significantly behind was the twobedroom sub-segment with 7 percent price growth, while the largest three-bedroom and more category was the slowest sub-segment with 5.1 percent average price growth.

All three of these sub-segments showed slowing price growth.

In the full title segment, the same relative picture emerges.

The smallest sub-segment, two bedrooms and less, showed the strongest price inflation to the tune of 9.6 percent in the first quarter of this year.

This was followed by the three-bedroom segment with 7.6 percent, while the largest four-bedroom and more segment showed the slowest price growth of 4.1 percent.

Unlike the sectional title sub-segments, however, the three full title sub-segments had showed some small renewed house price growth acceleration.

In short, we believe that the solid levels of first time buyer demand, following the 2008/9 recession, supported sectional title home buying a little more than that of full title buying in recent years.

However, first time buying is more interest rate sensitive and thus more cyclical on average, and the result has been some tapering off in the strength of this source of demand recently.

John Loos
Household and property sector strategist at FNB Home Loans.
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