Residential Property-Related Affordability is important to both lending institutions as well as their mortgage lending clients, as shifts in affordability have implications in terms of the level of financial pressure that they can exert on households.
Therefore, whereas a dramatic improvement in home and home-related affordability from late-2008 to 2012 was instrumental in lowering levels of bad debt and distressed home selling, further affordability improvements have been slow in coming since then, and certain home-related affordability measures are even deteriorating.
The home affordability picture in recent times has been something of a “mixed bag”, although we believe that taking all home-related affordability measures into account there has been a mild deterioration through 2014.
• After 2 quarters of mild deterioration, both of our main home affordability measures, namely the Average Price/Average Employee Remuneration and the Average Home Installment Repayment/Average Employee Remuneration Ratio Indices, improved (declined) mildly in the 3rd quarter of 2014. This was due to the combination of slower house price inflation in that quarter, along with noticeably stronger employee remuneration growth compared to the prior quarter, as strike action abated and employee wage payments normalized.
• However, other key related affordability measures have continued their deteriorating trends. The Household Sector Debt-Service Ratio (The cost of servicing the household sector debt burden, expressed as a percentage of Household Sector Disposable Income) continued to rise (deteriorating affordability) late in 2014, having been on a rising trend from a low of 8.5% at a stage of 2013 to 9.3% by the end of 2014 .
• Examining “competitor products” to housing, we also saw a deterioration in housing’s relative position, with Real House Prices (house prices measured against consumer goods and services prices) rising in the final quarter of 2014, having been on a broad rising trend since 2012.
• House prices have continued their rising trend relative to house rentals, slowly increasing the favourability of the rental option relative to home buying.
• Finally, arguably the most troublesome deterioration in home-related affordability remains in the area of Municipal Rates and Utilities tariffs, whose affordability deterioration looks set to continue unabated, driven most notably by electricity cost increases.