Seeing the GAP: Affordable housing insights from First National Bank

Lender attention on the so-called “gap market” in South Africa is a critical market development issue, that CAHF has been addressing through some of its work.  Two years ago, we explored the opportunity for new mortgage markets in SA, through a paper entitled “Bringing Life to Mortgage Markets” and the accompanying presentation.  The Transaction Support Centre that we support addresses this issue at the very local level.  

In October 2019, First National Bank’s Affordable Housing Division released research that they’d undertaken in the ‘gap’ market.  The research involved 200 telephonic interviews among the top 35+ estate agencies, working in the residential property sector.  The presentation is data-rich and offers important insights from one of South Africa’s Big 4 banks.  The press release that FNB issued together with the research is copied here:

Press Release – 29 October 2019: FNB’s Affordable Housing Insights have revealed that South Africa’s Affordable Market saw stronger activity in 3Q19following a relatively muted 2Q19. The Insights show that properties priced between R250k – R500k, classified as the ‘gap market’, have been more resilient and generated the most activity during the period.

The FNB Affordable Housing Insights is South Africa’s first in-depth view of the Affordable Housing Market. It is designed to shed light on activity in Affordable Housing Market versus the Traditional Market, through a survey with the country’s top real estate agencies in Gauteng, Western Cape, Eastern Cape and Kwa-Zulu Natal. The findings put a spotlight on demand and supply factors such as market activity, price dynamics, buyer patterns and buy-to-let activity.

Siphamandla Mkhwanazi Senior Economist at FNB, says, “We saw very interesting market dynamics in 3Q19, with findings showing that lower price segments attract strong interest from prospective home owners. On average, a property in the Affordable Housing space stays on the market for approximately 6 weeks with 13 average viewers per show room before it is sold. To put this into context, the conventional market averages 9.6 viewers and spends approximately 16 weeks on the market before a sale. Properties priced between R250k – R500k score relatively better on both measures, with 16 viewers per showroom, a duration of 5 weeks and 6 days on market.”

Price dynamics showed that approximately 1 in 3 properties in the Affordable segment sell below the initial asking price, at an average 12.7% discount. By contrast, over 95% of properties in the higher end sell below asking price, at approximately 10% discount. Interestingly, approximately 5% of properties in the Affordable Housing Segment sell above asking price, further implying strong levels of demand in the market.

Lee Mhlongo, CEO of FNB Home Finance says, “These findings affirm our view that prospective home buyers are looking and finding value in affordable housing. We believe that a better pipeline of supply, especially within the gap market, will go a long way to improving home ownership in our country. In our business, we offer 100% home financing solutions for the Affordable Housing market and we continue to work with developers to ensure that the supply can live up to current demand.”

FNB’s Insights also show vibrant buy-to-let activity with such purchases constituting an estimated 35% of all transactions. Once again, this is more prevalent in the R250k – R500k basket, with over 50% of transactions estimated to be buy-to-let. This gives credence to the view that there is inadequate supply at appropriate price points and contribute to strong house price growth in the lower end.

Upgrading, either buying a bigger property or moving closer to work and/or amenities, was the most prominent reason for property disposals in the lower end, constituting about 37% of all sales. The high propensity to move closer to workplaces is unsurprising, given rising living costs, and lack of affordable housing near economic opportunities. There were notable cases of downscaling, either due to financial pressure or lifestage. Those that sell under financial strain are more likely to look for a cheaper alternative, than opt for rental.  This supports the view that owning a home, above it being an investment, holds high sentimental value in the lower end.

Emigration and relocation-related sales remain generally low in Affordable Housing, but the trend is more prominent in higher price segments. Part of the emigration-related sales in the lower end could be attributed to higher income households disposing of their investment properties.

“Looking ahead, estate agents in the lower price baskets are more upbeat about near-term market activity and property price growth. Among the reasons commonly cited, apart from seasonality, is the positive consumer sentiment and the lower interest rate environment. By contrast, agents in the higher end commonly cite consumer pessimism, pricing and affordability as factors driving market outcomes,” concluded Mkhwanazi.