The Property Market

Has Realism in the Market entirely set in yet?

June 2012

Aspiration/Expectation Mismatches through cycles

• Introduction phase – aspirations/expectations lag reality

• Growth Phase – aspirations/expectations accelerating but still lagging reality

• Mature Phase – Aspirations/expectations catching up with “slowing” reality

• Decline Phase – Aspirations/Expectations “Ahead” of “Weakening” Reality = TENSION

The Industry/Product Life Cycle

Introduction Phase

Growth Phase

Mature Phase

Decline Phase

Time

House price slightly up recently, but don’t expect wonders yet

9.0%

2.3%

-20%

-10%

0%

10%

20%

30%

40%

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

FNB House Price Index - Real and Nominal Growth

FNB House Price Index - year-on-year percentage changeReal Average House Price (CPI adjusted) - year-on-year percentage change

House price slightly up recently, but don’t expect wonders yet

1.40%

0.96%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

FNB House Price Index Growth On a Seasonally-Adjusted Month-on-Month

Basis

FNB House Price Index - Seasonally Adjusted - m/m % change

25% “Over-valued”??? – Pick a Number – but further real price decline likely

0100000200000300000400000500000600000700000800000900000

1000000

1995 1998 2001 2004 2007 2010

2005

Ran

d Te

rms

Real House Prices - 1995-2011

Real house price (adjusted using PCE deflator) year-on-year % change Source: Absa; SARB

Long term trend line

0100000200000300000400000500000600000700000800000900000

1000000

1966 1972 1978 1984 1990 1996 2002 2008

2005

Ran

d Te

rms

Real House Prices - 1966-2011

Real house price (adjusted using PCE deflator) year-on-year % change Source: Absa; SARB

Long term trend line

Urbanisation continues to drive urban land scarcity higher

20

25

30

35

40

45

50

55

60

65

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

% o

f SA

Popu

latio

n U

rban

ised

Percentage of Population Urbanised - South Africa

The Big Build gathers steam, but still too slow

The Big Build has many years to run• 2010 started the infrastructure delivery ball rolling• Delivery is too little too late but it is gathering steam• Somebody has to pay, but in the end it will enhance economic growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

% o

f GDP

General Government Fixed Investment -Construction Works (Civils)

General Government Construction Works (Civils) as a Percentage of GDP

0

200000

400000

600000

800000

1000000

1200000

1400000

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

2005

Ran

ds

Real Value of Capital Stock of General Government and Parastatals

Real Value of Capital Stock - 2005 Prices(Rands) - General Government and Parastatals

Flattish period of general government and parastatal capital stock growth started seeing noticeable increase in pressure on urban infrastructure

Urban adjustment to land scarcity (and rates and tariff hikes?)

1061.451908

524.0513584

0

200

400

600

800

1000

1200

1950 -1954

1955 -1959

1960 -1964

1965 -1969

1970 -1974

1975 -1979

1980 -1984

1985 -1989

1990 -1994

1995 -1999

2000 -2004

2005 -2009

2010+

Long Term Average Residential Stand Size Trend (Square Metres)

Average stand size for homes valued by FNB Valuers from 2000 to the present - According to year in which homes were built

203.3422154

146.6587545

50

70

90

110

130

150

170

190

210

230

1950 -1954

1955 -1959

1960 -1964

1965 -1969

1970 -1974

1975 -1979

1980 -1984

1985 -1989

1990 -1994

1995 -1999

2000 -2004

2005 -2009

2010+

Squa

re M

etre

s

Average Building Sizes According to Building Year (Square Metres)

Average Residential Building Size By Year in which the home was builtFull Title Properties - Average Size By Building YearSectional Title Properties - Average Size By Building Year

Urban adjustment to land scarcity (and rates and tariff hikes?)

69.2%

57.4%

69.5%

51.6%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

1950 -1954

1955 -1959

1960 -1964

1965 -1969

1970 -1974

1975 -1979

1980 -1984

1985 -1989

1990 -1994

1995 -1999

2000 -2004

2005 -2009

2010+

Proportion of Properties With Garage(s)

Percentage of Properties with Garage - According to the year in which the home was built

40.0%

9.1%

51.5%

11.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1950 -1954

1955 -1959

1960 -1964

1965 -1969

1970 -1974

1975 -1979

1980 -1984

1985 -1989

1990 -1994

1995 -1999

2000 -2004

2005 -2009

2010+

Proportion of Homes with Domestic Workers' Quarters and Swimming Pools

Percentage of Homes with Swimming Pools - By year in which the home was built

Percentage of Homes with Domestic Workers' Quarters - According to year in which the home was built

Urban adjustment to land scarcity and declining fertility rates

4.3% 7.4%1.0% 3.7%

13.8% 10.6%

28.2% 33.5%

49.6%56.8%

59.7%

52.0%

20.6% 25.2%

7.5%11.4% 11.9%3.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1950 -1954

1955 -1959

1960 -1964

1965 -1969

1970 -1974

1975 -1979

1980 -1984

1985 -1989

1990 -1994

1995 -1999

2000 -2004

2005 -2009

2010+

Percentage of Properties by Room Number According to Year in Which Home Was Built

5 Bedrooms+

4 Bedrooms

3 Bedrooms

2 Bedrooms

1 Bedroom

Less than 1 Bedroom

Urban adjustment to land scarcity

925

776737

159

131

139

100

110

120

130

140

150

160

170

300

400

500

600

700

800

900

1000

2000-2004 2005-2009 2010+

Squa

re M

etre

s

Average Stand vs Building Size of Homes Included in the FNB House Price Index

Average stand size of properties included in the FNB House Price Index (square metres)

Average building size of properties included in the FNB House Price Index

SA Long term economic growth rate trends

4.1

2.6 2.7

2.0

0.0

2.83.2

4.9

1.5

0

1

2

3

4

5

6

1969-1973

1974-1978

1979-1983

1984-1988

1989-1993

1994-1998

1999-2003

2004-2008

2009-2011

%

Real GDP Growth - 5-year annual averages

Real GDP Growth - 5-year annual averages (%)

Long term consumer price inflation and short term rates

trends

Long Term Consumer Inflation and Interest Rate Trends

0

10

20

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

%

Consumer Price Inflation (PCE Deflator - y/y % change) Prime Rate

US Household De-Leveraging may have years to run

In the mean time we live in hope that US Govt borrow and Fed printing will keep economy going

US Current Account Deficit

-10-8-6-4-20246810

-7

-5

-3

-1

1

3

5

7

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Bond yield/TB

Real R

ate -%%

US Current Account vs US Interest Rates

US Current account as % of GDPUS Real 3-month TB rateUS 5-year Government Bond

Inflation - mild turn for the better, the benefit of a slowing economy

7.21

-20

-10

0

10

20

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12%

Producer Price Inflation vs Consumer Price Inflation

PPI - y/y% PPI - Imports - y/y % CPI - y/y %

-25-20-15-10

-505

101520253035

Jan-09 Jan-10 Jan-11 Jan-12

%

Troublesome Components of Consumer Price Inflation

CPI - Food - y/y%

CPI - Electricity - y/y%

CPI - Water and other services - y/y%

CPI - Private Transport Running Cost - y/y%

0

5

10

15

20

Jan-05 Jan-07 Jan-09 Jan-11

%

Consumer Price Inflation

CPI - y/y% CPI - Services - y/y% CPI - Goods - y/y%

Global Economic Growth Broad Slowdown expected, risks still high• UN – 2.6% GDP Growth forecast in 2012, down from 4% in 2010, and 2.8%

in 2011 (Downward revision)

• World Bank – 2.5% GDP growth in 2012, down from 4.1% in 2010 and 2.7% in 2011 (Downward Revision)

• IMF - “Slowing Growth, Rising Risks”. 4% GDP growth forecast in 2012, but downward revision set to occur, after 4% in 2011 and 5.1% in 2010

• IMF - Some slowing in 2011 had been expected due to end in inventory replenishment cycle. Rise in oil prices and Japan Tsunami also negative events in 2011. But concerns have increased due to “lack of global re-balancing”, “increased fiscal and financial uncertainty” (concerns expanded from Europe to Japan and US), and overheating in some emerging economies

• SARB – CPI inflation peak in Q2 2012, but thereafter move back to the target range,

• 2.9% GDP growth forecast in 2012, down from 3.1% in 2011

• JL – house price growth to average around 6%, slightly better than average for 2011 due to good start to 2012, but down from where we are currently - based on assumption of reasonable though slower economic growth. Recession expected to equal nominal price decline

Mild improvement recently, but FNB Valuers point to Market Imbalance continuing

46.26 50.38

57.85

2530354045505560657075

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Inde

x Sc

ale

0 to

100

FNB Valuers Residential Market Strength Indices

FNB Valuers' Market Strength Index (Scale 0 to 100 where 50 indicates a balanced market)Demand rating (scale 0 to 100)

Supply rating (scale 0 to 100)

-3.5%

-1.5%

0.5%

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

FNB Valuers Residential Market Strength Indices - Month-on-Month % Change

FNB Valuers' Market Strength Index Demand rating Supply rating

-10%-5%0%5%10%15%20%25%30%35%40%

-15.0%

-5.0%

5.0%

15.0%

25.0%

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

FNB Valuers Residential Market Strength Index vs House Price Growth

- Year-on-year % Change

FNB Valuers' Market Strength IndexFNb House Price Index - year-on-year % change (Right Axis)

Residential Development Activity “settling” at lower levels - development sector battles to compete with existing mkt

22.1%

0.0%

10.0%

20.0%

30.0%

40.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Full Title Property Replacement Cost Gap

Difference between the average full title building replacement cost and the average existing full title property value, expressed as a percentage of average existing full title property value

Residential market balance shows no improvement

15.6

0

4

8

12

16

20

2005 2006 2007 2008 2009 2010 2011 2012

Wee

ks a

nd D

ays

on th

e M

arke

t

Average time that a property is on the market

Weeks and days that the average property is on the market before being sold Smoothed

Residential market balance shows no improvement

88

10

30

50

70

90

2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Proportion of properties sold at less than asking price

Percentage of properties sold at less than asking price Smoothed

-11%-12% -12%

-11%-12%

-11%

-13% -13%

-11%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%2010 2011 2012

Average Percentage Drop in Asking Prices

Average percentage drop in asking price by sellers required to drop their price to make the sale

Financial Pressure-related selling still significant

20%

0%

5%

10%

15%

20%

25%

30%

35%

Q1-2008 Q3-2008 Q1-2009 Q3-2009 Q1-2010 Q3-2010 Q1-2011 Q3-2011

% o

f Tot

al S

ales

Downscaling due to Financial Pressure vs Upgrading

Percentage of total sellers downscaling due to financial pressure

Percentage of sellers selling in order to upgrade

Reasons for selling (As % of Total Sales)Total High Net Worth

Upper income

Middle income

Lower income

Downscaling due to financial pressure20% 17% 21% 20% 22%Downscaling with life stage 23% 27% 23% 21% 22%

Emigrating 4% 3% 4% 4% 3%Relocating within SA 9% 9% 9% 9% 9%Upgrading 17% 17% 16% 17% 18%Moving for safety and security reasons9% 11% 9% 9% 7%Change in family structure 12% 10% 12% 12% 14%Moving to be closer to work or amenities6% 6% 6% 6% 5%

Debt-to-disposable income Ratio still very high for a bottom turning point

74.6

5791113151719212325

40

50

60

70

80

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

%%

Household Debt to Disposable Income Ratio vs Interest Rates

Household debt-to-disposable income ratio (Left Axis) Prime Rate

Basics In, Luxuries Out

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000 2008

Perc

enta

ge C

hang

e

Annual House Price InflationBy Area Price Category

Upper End Metro Suburbs Middle Income Areas Lower Income Metro Areas

Affordable Metro Areas Luxury Areas

Basics In, Luxuries Out

-6.2%

4.9%

-10%-5%0%5%

10%15%20%25%30%35%40%45%50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Perc

enta

ge C

hang

e

Holiday Towns vs Major Metros- Annual Average House Price Growth

Holiday Towns Major Metropolitan Regions

9.9%

4.9%

-10%-5%0%5%

10%15%20%25%30%35%40%45%50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Perc

enta

ge C

hang

e

Former Black Townships vs Major Metros- Annual Average House Price Growth

Former Black Townships in Major Metros Major Metropolitan Regions

Rental Market Ticks Over, but subdued by low interest rates and strong supply

2

4

6

8

10

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

%

CPI Inflation - Home Rentals

CPI - Rentals - Year-on-year % change CPI - Flat Rentals - y/y%

CPI - Townhouse Rentals - y/y% CPI - House Rentals - y/y%

Low buy-to-let buying gradually improves rental market supply-demand balance

9

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Proportion of buyers buying to let

Percentage of total buyers buying to let Smoothed

Agents not anticipating buy-to-let fireworks any time soon

0.036

-0.1

0.0

0.1

0.2

2004 2005 2006 2007 2008 2009 2010 2011 2012

Scal

e -1

to +

1

FNB Buy-to-Let Market Confidence Indicator

Buy-to-let Composite Confidence Indicator (Scale -1 to +1)

Housing yields may have risen, but still seem to be low

20

40

60

80

100

120

140

160

1970 1975 1980 1985 1990 1995 2000 2005 2010

Housing Yield Index

Average Rental/Average House Price Index (2000=100)Raw datasources:

SARB, Absa,

Renewed 1st Time buyer interest a “drain” on the rental market for now

12

25

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012

%

First time buying activity

First time buyers expressed as a percentage of total buyers Smoothed

Household balance sheet still fragile, not allowing major investment in property

0.0

-2

0

2

4

6

1990 1993 1996 1999 2002 2005 2008 2011

%

SA Household Net Savings Rate

Net household savings as % of Disposable income

Key Focal Points

• Affordability is king – market adapting to financial pressure and huge municipal and rates cost increases – Relatively good for the affordable end but bad for the luxury end

• Size counts – far smaller is going to be far better

• Going Green – How? • (Green building one of the fastest growing economic sector - according to

Wackhead at least)

• Transport cost increases – looming

• Location near to work place, important facilities, open space

• Weak market and financial pressure = Need for reliable information and expertise

• Gradual rise in yields as rental stock gradually becomes more constrained

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