FNB – The Housing Affordability picture shows no strong trend of late. Slower house price inflation works in favour of affordability improvement, but a resumption in interest rate hiking could change this

The home affordability picture in recent times continues to be a “mixed” and broadly “directionless” one.

Slowing house price inflation, along with a lack of further interest rate hiking since July 2014 has led to some slight improvement (decline) in our main housing affordability measures.

Of our 2 main affordability measures, the 1st measure, namely the Average House Price/Average Employee Remuneration Index, declined (improved) slightly by -0.4% in the 4th quarter of 2014 compared to the level for the previous quarter.

The 2nd measure, namely the “Installment Payment Value on a new 100% Bond on the Average Priced House/Average Employee Remuneration Ratio” Index, also declined by -0.4% in the 4th quarter.

Both indices were driven lower by average employee remuneration growth once more exceeding slowing house price growth in the 4th quarter, and this was the 2nd consecutive quarter of mild affordability improvement after some prior quarters of deterioration through 2013 and earlier last year.

The affordability levels remain far improved on the highs of “in-affordability” experienced back around 2007/8. The cumulative decline (improvement) in the 2 affordability indices since their 2007 peak levels are -36.5% in the case of the Average Price/Income Ratio Index and -53% in the case of the Instalment/Income Ratio Index.

And with electricity cost increases having been less severe for some time, Home Running Cost-related Affordability also appeared to show some slight improvement (decline) late in 2014.

However, comparing house price trends to “competitor” products, these being consumer goods and services (who compete with property for household spend) and rental properties (the alternative to buying a home), house prices continued to become less competitive early in 2015, out-inflating both consumer goods and services as well as rentals. This has translated into mild increases in both Real House Prices (house prices adjusted for consumer price inflation) as well as the House Price/Rental Ratio.

The interest cost on household debt relative to disposable income also continued to rise (i.e. affordability deterioration) early in 2015, with the higher-priced consumer-related forms of household credit still growing faster than the cheaper home loans category.

Looking forward, the mixed picture in the various affordability trends looks set to continue. With house price inflation slowing, it is conceivable that the Average House Price/Average Income Ratio measure of home affordability will continue to decline. However, we do expect interest rate hiking to resume, which would probably drive the Home Loan Instalment/Average Income Ratio higher (worse). Should interest rate hiking indeed resume, this would almost certainly take the Household Debt-Service Ratio higher too.

A return to double-digit electricity tariff hiking announced earlier this year could also see the Home Running Cost Affordability measure start to deteriorate.

But relative to “competitor products”, housing may fare slightly better in the near future in terms of “relative affordability”. CPI inflation is rising once more, following an early-2015 dip, while rental inflation is also creeping gradually higher according to CPI Rental numbers. These upward movements, along with slowed house price inflation of late, could lead to a decline in Real House Prices (House Price inflation adjusted for CPI), along with some decline in the House Price/Rental Ratio.

Read more here: FNB Property Barometer Residential Affordability July 2015