Pricing of residential homes and pricing realism in the market as a whole is an important issue impacting on a seller's ability to realize a sale and move on and an estate agent's ability to secure a favourable result for their client.
Every seller typically has an inflated opinion of value. This is normal and can be expected given their intimate understanding of their own property and the natural desire to be able to sell and realize the best possible price for their property.
Buyers on the other hand fully understand the need to buy as aggressively as possible and will naturally be looking to secure a property on the most favourable terms. In a thousand years from now this fundamental dynamic will still be in place and as long as humans are transacting you will need other humans (agents) facilitating transactions.
The 1st quarter FNB Estate Agent Survey results on price realism on a national level provides some interesting insights into where we currently are in this pricing cycle.
Because house prices are typically slow to adjust to a slowdown in market demand, other factors such as the length of time on the market are important to consider to see if we are moving away from an equilibrium price level.
On a national level the average time of homes on the market declined in the first quarter of 2018 from 17 weeks and 2 days to 14 weeks and 1 day. If 12 weeks is considered a reasonable national equilibrium level then we see that the market has moved closer to this level and this improvement can be regarded as the early signs of an improvement in the residential market, even though average pricing may not have reflected this possible strengthening as yet.
Another indicator of market price realism is the percentage of sellers having to drop their asking price in order to realize a sale. The 1st quarter 2018 showed a decline (improvement) in this figure from 95% to 91%. Nevertheless we are still at a very high point in this regard when considering the data from 2004 to 2018, indicating that overpricing remains a factor in general.
The third measure of pricing realism is the average percentage drop in asking prices required to achieve a sale. This figure dropped from -10% in the 4th quarter of 2017 to -8.2% in the 1st quarter of 2018. All three measures therefore point to a quarterly improvement in the balance between demand and supply of homes in the market.
If the major regional metro areas within South Africa are considered we definitely notice a significant variation in performance. Gauteng is currently the strong point in terms of pricing realism. The average time a property is on the market in Gauteng is 11 weeks and 5 days while the Coastal Metros are significantly higher at 17 weeks and 6 days.
The national and regional averages are good at providing general market trends and insights, even though on a micro-level larger variations can be expected. Interestingly Tshwane's average length of time on the market is now 10 weeks and 6 days, well below the greater Johannesburg's 14 weeks or Cape Towns 15 weeks. Tshwane could start outperforming the other metros in terms of house price growth in the future.
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