PROPERTY BAROMETER – HOUSE PRICES BY SEGMENT In a financially constrained environment, translating into a focus on home affordability, it was probably to be expected that the Sectional Title Market’s price growth would mildly outpace that of Full Title in recent times 26 January 2016 The past few years have been characterized by solid levels of 1st time home buying. This, along with the constrained nature of Household Sector finance, translates into a search for relative affordability in the housing market. Therefore, it is perhaps to be expected that the smaller sized home market segment has performed a little stronger than the more costly-to-run large-sized homes. In turn, this should translate into a stronger performance in the Sectional Title Market, and indeed this appears to have been the case. In the 4th quarter of 2015, the FNB Sectional Title House Price Index rose by 7.7% year-onyear, compared to the Full Title House Price Index’s 6.4%. This was the 8th consecutive quarter that the Sectional Title Index had shown mildly stronger growth than that of the Full Title Index Since the start of the post-recession house price recovery in the 3rd quarter of 2009, the cumulative growth of the Full Title House Price Index has still been slightly more than that of the Sectional Title Index, to the tune of 40.9%, versus 38.6% for Sectional Title, so the Sectional Title Index has lagged slightly during the recovery years. But since the beginning of 2001, just after the indices started, the Sectional Title Index has outpaced the Full Title Segment, growing cumulatively by 340%, compared to the 290.3% of the Full Title Index.

% Difference between average full title price and average sectional title price 40%

30%

26.0%

24.7%

23.9%

20% 9.8%

10%

0% 2001

2003

2005

2007

2009

2011

2013

2015

The Rand Difference between the average price of full title properties and the average sectional title price, expressed as a percentage of the average sectional title price

Therefore, whereas the percentage difference between the average Full Title house price and that of Sectional Title was near 40% early in 2001, at the end of 2015 it was 23.9%. Sectional Title values have thus gained noticeably on the Full Title average over the past decade and a half. FNB’s valuers back this up with their own collective view of market strength, as captured in the Full and Sectional Title Market Strength Indices (MSI) (see note on page 4 for explanation). Here, as a group they have consistently perceived the Sectional Title Market to be stronger over the past 2 years or so, thus returning a higher MSI reading for the Sectional Title Market.

Within the Sectional Title Market, it is the smallest sized category, namely the “Less than 2 Bedrooms” category, which has shown the strongest price inflation and MSI of all 3 of the Room categories of late,, rising by a very solid 16.5% year-on-year in the final quarter of 2015. By comparison, the “2 Bedroom Sectional Title” segment inflated by 7.2%, and the “3 Bedroom and More” segment by 6.6%.

The top performing sub-segment within Full Title was also the smallest sized “2 Bedrooms and Less” segment, with 6.9% year-on-year average price inflation, followed by the “3 Bedroom” segment with 6.6% inflation, and the largest “4 Bedrooms and More” segment only rising by 4%. Therefore- be it Sectional or Full Title, the theme remains the same it seems, i.e. “smaller performs better”.

These relative performances of the sub-segments reflect the combination of a still strong desire of aspirant 1st time buyers to get onto the property ladder in recent years, coupled with a financially constrained Household Sector in a stagnating economic environment. Households are constrained by the combination of slow employment and income growth, along with high levels of indebtedness. On top of this, home-related costs, especially Municipal rates and Utilities Tariffs (Eskom most notably), have been rising significantly faster than overall Consumer Price Inflation. Electricity and water costs can be contained by owning a “smaller” home with less luxuries, as well as containing maintenance and general running costs. Insurance and security costs are 2 such key costs. Finally there is the issue of increasing land scarcity in major urban areas. Sectional Title properties have the ability to better address both affordability and running cost issues, on top of often utilizing scarce land more effectively than the Full Title category. Sectional Title price performance could thus continue to outperform Full Title for the foreseeable future, as we move into tougher economic times. However, both property categories are expected to slow at the hands of rising interest rates and a multi-year economic growth stagnation.

JOHN LOOS: HOUSEHOLD AND PROPERTY SECTOR STRATEGIST 087-328 0151 [email protected] The information in this publication is derived from sources which are regarded as accurate and reliable, is of a general nature only, does not constitute advice and may not be applicable to all circumstances. Detailed advice should be obtained in individual cases. No responsibility for any error, omission or loss sustained by any person acting or refraining from acting as a result of this publication is accepted by Firstrand Group Limited and / or the authors of the material. First National Bank – a division of FirstRand Bank Limited. An Authorised Financial Services provider. Reg No. 1929/001225/06

ADDENDUM - NOTES: Note on The FNB Average House Price Index: Although also working on the average price principle (as opposed to median or repeat sales), the FNB House Price Index differs from a simple average house price index in that it could probably be termed a “fixed weight” average house price index. One of the practical problems we have found with house price indices is that relative short term activity shifts up and down the price ladder can lead to an average or median price index rising or declining where there was not necessarily “genuine” capital growth on homes. For example, if “Full Title 3 Bedroom volumes remain unchanged from one month to the next, but Sectional Title 1 Bedroom and Less (the cheapest segment on average) transaction volumes hypothetically double, the overall national average price could conceivably decline due to this relative activity shift. This challenge of activity shifts between segments is faced by all constructors of house price indices. In an attempt to reduce this effect, we decided to fix the weightings of the FNB House Price Index’s subsegments in the overall national index. This, at best, can only be a partial solution, as activity shifts can still take place between smaller segments within the sub-segments. However, it does improve the situation. With our 2013 re-weighting exercise, we have begun to segment not only according to room number, but also to segment according to building size within the normal segments by room number, in order to further reduce the impact of activity shifts on average price estimates. The FNB House Price Index’s main segments are now as follows: • The weightings of the sub-segments are determined by their relative transaction volumes over the past 5 years, and will now change very slowly over time by applying a 5-year moving average to each new price data point. The sub-segments are: - Sectional Title:  Less than 2 bedroom – Large  Less than 2 bedroom – Medium  Less than 2 bedroom – Small   

2 Bedroom – Large 2 bedroom – Medium 2 bedroom – Small

  

3 Bedroom and More - Large 3 Bedroom and More - Medium 3 Bedroom and More - Small

- Full Title:  2 Bedrooms and Less - Large  2 Bedrooms and Less - Medium  2 Bedrooms and Less - Small   

3 Bedroom - Large 3 Bedroom - Medium 3 Bedroom - Small

  

4 Bedrooms and More - Large 4 Bedrooms and More - Medium 4 Bedrooms and More – Small

The size cut-offs for “small”, medium” and “large” differ per room number sub-segment. “Large” would refer to the largest one-third of homes within a particular room number segment over the past 5 year period, “Medium” to the middle one-third, and “Small” to the smallest one-third of homes within that segment. • The Index is constructed using transaction price data from homes financed by FNB. • The minimum size cut-off for full title stands is 200 square metres, and the maximum size is 4000 square metres

• The maximum price cut-off is R10m, and the lower price cut-off is R20,000 (largely to eliminate major outliers and glaring inputting errors). • The index is very lightly smoothed using a Hodrick-Prescott smoothing function with a Lambda of 5. Note on the FNB Valuers’ Market Strength Index: *When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple “good (100)”, “average (50)”, and “weak (0)”. From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers’ Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.

SEGMENT PERFORMANCES 

Total Market FNB Valuers Residential Market Strength Index

FNB South Africa House Price Index Growth 20%

30%

15%

20%

10%

10%

7.0% 5%

0%

0% 2002

2004

2006

2008

2010

2012

70.0 Index Scale 0 to 100

40%

60.0

50.0

40.0

2014

-10%

55.618 53.061 51.279

30.0 2001

-5% FNB South Africa House Price Index - y/y % change Quarter-on-quarter percentage change (Right Axis)



2003 2005 2007 2009 2011 2013 2015 FNB Valuers Market Strength Index (Scale 0 to 100) FNB Valuers Demand Strength Index FNB Valuers Supply Strength Index

Sectional Title vs Full Title FNB Valuers Residential Market Strength Indices - By Property Type

Sectional Title vs Full Title Market House Price Growth 40%

65.0

30%

20%

10%

7.7% 6.4%

Index Scale 0 to 100

55.0

52.144 51.008 45.0

35.0

0% 2002

2004

2006

2008

2010

2012

2014 25.0

-10%

2001

Full Title - y/y %

2003

Sectional Title - y/y %

2005

2007

2009

Full Title

Year-on-Year growth in the Market Strength Indices - By Property Type

2011

2015

% Difference between average full title price and average sectional title price 40%

20%

30% Year-on-year percentage change

2013

Sectional Title

26.0%

24.7%

10%

23.9%

20% 0%

2002

2004

2006

2008

2010

2012

2014

9.8%

10%

-10%

0% 2001

-20%

Full Title



2003

2005

2007

2009

2011

2013

2015

The Rand Difference between the average price of full title properties and the average sectional title price, expressed as a percentage of the average sectional title price

Sectional Title

Full Title FNB Valuers Residential Market Strength Indices - Full Title 65.0

Full Title Market Sub-Segment House Price Growth 40%

20% 10%

6.9% 6.6% 4.0%

0% 2002

2004

2006

2008

2010

2012

2014

Index Scale 0 to 100

30% 55.0 51.18 50.97 50.75 45.0

-10% 35.0

-20% Full Title 3 Bedroom - y/y % Full Title - 2 Bedrooms and Less - y/y % Full Title 4 Bedrooms and More - y/y%

2001

2003

3 Bedrooms

2005

2007

2009

2011

2 Bedrooms and Less

2013

2015 4 Bedrooms



Sectional Title

Sectional Title Market Sub-Segment House Price Growth

65

FNB Valuers Residential Market Strength Indices - Sectional Title

45%

25%

16.5%

15%

7.2% 6.6%

5% -5%2002

2004

2006

2008

2010

2012

Index Scale 0 to 100

60

35%

55

45 40

2014

35

Sectional Title 3 Bedrooms and More - y/y % Sectional Title - 2 Bedrooms - y/y % Sectional Title - Less than 2 Bedrooms - y/y%



2001

2003

2007

2009

2011

2013

Less than 2 Bedrooms

2015 2 Bedrooms

Sectional Title Per Square Metre Sectional Title Values Rand/Square Metre

60%

40% 30% 20% 16.1% 10%

4.8% 4.1%

0% 2004

2006

2008

2010

2012

2014

-10%

Rand/Square Metre

50%

15000 14000 13000 12000 11000 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000

13 138 10 119 9 800 8 633

2001

3 bedrooms and More



2005

3 Bedrooms

Growth in Sectional Title Values/Square Metre - Year-on-Year Percentage Change

2002

53.86 51.88 51.78

50

Less than 2 bedrooms

2 bedrooms

2003

Total Market

2005

2007

2009

Less than 2 bedrooms

2011

2013

2 bedrooms

2015

3 bedrooms and More

Home Size Segments

House Price Growth by Size Category (FNB Data)

House Price Indices (Q1 2001=100) by Size Category

50% 40%

455.4 437.5 375.5

450

30% 350 20% 10.5% 6.9% 3.1%

10% 0% 2002

2004

2006

2008

2010

2012

250 150

2014

-10% 50

-20%

2001 Medium (80-230 sq. m.)



Large (230-800 sq.m.)

Small (20-80 sq.m)

Existing Homes vs Vacant Land

FNB Valuers Residential Market Strength Indices - Existing Homes vs Vacant Land

Index Scale 0 to 100

70.0 60.0 51.28

50.0

44.51 40.0 30.0 20.0 2001

2003

2005

2007

Existing Home Market

2009

2011

2013 Vacant Land

2015

2003

2005

Medium (80-230 sq. m.)

2007

2009

2011

Large (230-800 sq.m.)

2013

2015

Small (20-80 sq.m)

AVERAGE HOUSE PRICE BY MAJOR SEGMENT 2011

2012

2013

2014

2015

Q1-2015

Q2-2015

Q3-2015

Q4-2015

FULL TITLE SEGMENT Full Title Average Price (Rand) - year-on-year % change - quarter-on-quarter % change 2 Bedrooms and Less (Rand) - year-on-year % change - quarter-on-quarter % change 3 Bedroom (Rand) - year-on-year % change - quarter-on-quarter % change 4 Bedrooms and More (Rand) - year-on-year % change - quarter-on-quarter % change

853 714 3.3%

905 413 6.1%

965 689 6.7%

1 033 165 7.0%

1 098 337 6.3%

442 464 3.6%

468 237 5.8%

499 332 6.6%

543 620 8.9%

583 110 7.3%

891 563 4.4%

941 594 5.6%

998 801 6.1%

1 057 972 5.9%

1 118 209 5.7%

1 422 113 3.8%

1 493 116 5.0%

1 571 271 5.2%

1 659 475 5.6%

1 739 988 4.9%

1 072 944 6.3% 1.5% 568 861 7.9% 1.7% 1 091 386 4.9% 1.4% 1 715 294 5.9% 1.0%

1 088 845 6.2% 1.5% 577 906 7.3% 1.6% 1 107 845 5.3% 1.5% 1 731 103 5.1% 0.9%

1 106 442 6.3% 1.6% 587 595 7.0% 1.7% 1 126 742 6.0% 1.7% 1 747 953 4.4% 1.0%

1 125 116 6.4% 1.7% 598 079 6.9% 1.8% 1 146 861 6.6% 1.8% 1 765 602 4.0% 1.0%

857 866 6.9% 1.8% 602 739 9.5% 3.1% 752 350 6.9% 1.8% 1 146 008 6.0% 1.4%

874 084 7.1% 1.9% 627 030 11.8% 4.0% 766 142 7.3% 1.8% 1 163 365 5.8% 1.5%

890 816 7.4% 1.9% 653 108 14.4% 4.2% 778 947 7.3% 1.7% 1 183 585 6.1% 1.7%

908 352 7.7% 2.0% 680 922 16.5% 4.3% 791 963 7.2% 1.7% 1 205 363 6.6% 1.8%

9 451 6.8% 1.7% 11 514 7.1% 1.8% 9 496 6.1% 1.6% 8 458 8.3% 1.9%

9 664 8.2% 2.3% 12 056 12.0% 4.7% 9 674 7.5% 1.9% 8 585 7.5% 1.5%

9 867 9.3% 2.1% 12 515 15.1% 3.8% 9 737 7.4% 0.7% 8 607 5.7% 0.3%

10 119 8.9% 2.6% 13 138 16.1% 5.0% 9 800 4.8% 0.6% 8 633 4.1% 0.3%

SECTIONAL TITLE SEGMENT AVERAGE HOUSE PRICE Sectional Title Average House Price (Rand) - year-on-year % change - quarter-on-quarter % change Less than 2 Bedroom (Rand) - year-on-year % change - quarter-on-quarter % change 2 Bedroom (Rand) - year-on-year % change - quarter-on-quarter % change 3 Bedrooms and More (Rand) - year-on-year % change - quarter-on-quarter % change

683 596 2.1%

719 118 5.2%

767 177 6.7%

822 709 7.2%

882 779 7.3%

471 569 2.7%

492 909 4.5%

521 483 5.8%

566 789 8.7%

640 950 13.1%

622 677 0.0%

640 535 2.9%

675 938 5.5%

720 641 6.6%

772 351 7.2%

950 381 3.9%

997 402 4.9%

1 041 523 4.4%

1 106 651 6.3%

1 174 580 6.1%

8 165 3.4%

8 427 3.2%

9 025 7.1%

9 775 8.3%

9 650 5.8%

10 063 4.3%

10 926 8.6%

12 306 12.6%

8 187 2.9%

8 511 4.0%

9 091 6.8%

9 677 6.4%

7 268 4.8%

7 499 3.2%

8 057 7.4%

8 571 6.4%

SECTIONAL TITLE PER SQUARE METRE Sectional Title Average Price (Rand/square metre) 7 894 - year-on-year % change 0.5% - quarter-on-quarter % change 9 122 Less than 2 Bedroom (Rand/square metre) - year-on-year % change 1.6% - quarter-on-quarter % change 7 959 2 Bedroom (Rand/square metre) - year-on-year % change -0.1% - quarter-on-quarter % change 6 933 3 Bedrooms and More (Rand/square metre) - year-on-year % change 1.5% - quarter-on-quarter % change

AVERAGE HOUSE PRICE BY SIZE CATEGORY 2011

2012

2013

2014

2015

1 581 893 2.1%

1 653 509 4.5%

1 731 377 4.7%

1 809 679 4.5%

1 884 483 4.1%

847 754 2.4%

892 857 5.3%

920 274 3.1%

986 247 7.2%

1 045 911 6.0%

418 396 4.5%

446 693 6.8%

477 708 6.9%

523 644 9.6%

562 894 7.5%

Q1-2015

Q2-2015

Q3-2015

Q4-2015

HOUSE PRICES BY HOME SIZE Large Homes (Rand) - year-on-year % change - quarter-on-quarter % change Medium Sized Homes (Rand) - year-on-year % change - quarter-on-quarter % change Small Sized Homes (Rand) - year-on-year % change - quarter-on-quarter % change

1 861 867 6.2% 0.7% 1 021 368 5.4% 1.4% 539 613 5.4% 0.5%

1 872 366 3.3% 0.6% 1 037 166 5.9% 1.5% 549 925 5.9% 1.9%

1 896 111 4.0% 1.3% 1 048 953 6.0% 1.1% 568 716 8.0% 3.4%

1 907 588 3.1% 0.6% 1 076 155 6.9% 2.6% 593 323 10.5% 4.3%