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The 3 bedroom market by comparison may be driven by the less cyclical demand of more established families who do not have the luxury of being able to stay in their parents’ homes as they wait for better economic and interest rate times. The average price for the freehold 3 bedroom market was R826 385 in the third quarter, while the sectional title 3 bedroom average was R926 835.

With regard to lower income groups and the freehold 2 bedroom and less segment, their financial situations appear to be a little more fragile than those households in the higher income brackets.

The lower income end experiences higher average consumer price inflation, which has been caused by the fact that food and transport costs have been the key driver of the overall inflation surge in recent years, and these expenditure items have a higher weighting in the lower income earners’ expenditure basket.

Due to lower income earners budgets allowing less room to manoeuvre, due to a high portion of expenditure items being essential items, it is perhaps unsurprising too that
some estate agents surveyed in the FNB Property Barometer were telling us in 2007 that the National Credit Act implementation last June impacted more heavily on the lower end of the market’s ability to acquire home loans.

That’s not to say that the NCA implementation was a bad thing, because the Property Barometer also tells us that during these stressed times it is indeed that lower income
market segment already owning property that is experiencing the most financial stress (probably for reasons mentioned above), and that this is where the highest percentage of “selling to downgrade due to financial pressure” is taking place.

This group may not only be battling higher consumer price inflation than higher income households, but may also find job security and opportunities somewhat less during these tough economic times than more highly-skilled counterparts, given that it is more highly skilled labour that is in short supply in SA.

According to the most recent Barometer survey, agents working in lower income areas (self-defined by the agents) believe that on average up to 40% of lower income sellers are selling to downgrade due to financial pressure.

A decline in both first time buying as well as buy-to-let buying by as a percentage of total buying may also have impacted more negatively on the 2 bedroom and less market segment, as the smaller-sized segment is where much of the first time buying and buy-to-let activity is believed to take place. These 2 factors may be more applicable to the more up-market sectional title end of the “2 bedroom and less”
segment.

The risks to the residential property market are increasingly shifting away from inflation and interest rates and towards economic growth risks, driven by what is transpiring across the globe.

Both CPIX inflation as well as Producer price inflation (a good leading indicator of future direction on CPIX) for September took a turn for the better (lower). CPIX inflation declined from 13,6% in August to 13% year-on-year in September, while producer price inflation fell by a more significant 19.1% to 16%.

Although the rand is currently going through a weak phase, global commodity prices have fallen quite dramatically (Brent crude oil down from USD145/barrel on July 3 to levels around USD60/barrel currently), and it is not foreseen that the weaker rand will totally offset significantly lower commodity prices.

This, I guess, is the good side to slower global economic prospects, i.e. that commodity prices normally adjust downward. The prospects for interest rate cuts early in 2009 have thus increased, and our expectation is for the first rate cut to take place in April next year.

But I would expect lending institutions in the residential property market to continue to take a cautious approach for some time, because these are not normal global economic times.

End of Part Two