The Standard Bank House Price Index (HPI) grew by 6.8% y/y in May, down from an upwardly revised 7.0% y/y in April (originally 6.9% y/y). Looking at property performance by type, freehold properties slowed to 7.9% y/y in May from 9% y/y in April. In contrast, sectional units accelerated to 9.8% y/y in May from 7.7% y/y in April (fig 1).
· From the supply side, the number of residential units coming into the market grew 9.4% y/y. In Q1:2016, about 9,300 new units were completed, compared to 10,808 in Q4:2015 and 8,500 in Q1:2015 (fig 3). Standard Bank notes that building activity has not recovered from the recession of 2009. Since the recession, for the period Q1:2010-Q1:2016, new units coming into the market have averaged around 10,000 per quarter, a far cry from an average of 17,300 per quarter for the period Q1:2003-Q4:2008 (fig 4). Commensurately, GDP growth has halved, from an average of 4.6% between Q1:2003-Q4:2008 to 2.3% between Q1:2010 to Q4:2015.
· Slowing growth in the HPI is in line with slowing growth in mortgage advances and less purchasing activity (fig 5), as well as tighter lending standards and reduced risk appetites by lenders (fig 2). In May, mortgage advances slowed for a second consecutive month, to 4.3% y/y from 4.5% y/y in April. Standard Bank think that rising interest rates and a softening labour market are starting to negatively affect demand and supply of mortgages and ultimately house prices (fig 6).
· Despite SA escaping a downgrade by S&P on Friday the 3rd of June 2016, Standard Bank pencils in another 50bps hike in 2016, which will continue to soften demand for mortgages.
· Standard Bank uses the SARB’s 50 bps repo rate increase January 2016 as a case study to estimate the potential effect of further hikes in the repo rate on the affordability of houses. The sample period is carefully selected to capture home purchases after the November 2015 hike but before the January 2016 hike. Standard Bank then grouped the sample by income and identify a median buyer in each income group. Standard Bank quantified the increase in the median installment per income group, keeping buyer preferences constant (e.g., preferred house price; loan amount; loan term etc.).
Standard Bank constructs income groups as follows:
Low income: <="" li="">
Emerging middle income: R16 418- R33 333 pm;
Middle income: R33 334-R123 417 pm; and
Upper Income: R 123 418 pm+.
Standard Bank finds that, post the 50bps hike in January 2016:
Low income group: The median monthly installment on a house grew by 3.5% or R125 (fig 7). Effectively, this reduced the median home buyer’s disposable income, which for the purpose of this analysis Standard Bank defines as income after tax & mortgage payments, by 1.74% (fig 9). Put differently, this is equivalent of a pay-cut of 1.74%. Installments as a proportion of median take-home pay (net income after tax) increased from 32.9% to 34.1% (Fig 8).
Emerging middle income group: The median monthly Instalment grew by 3.4% or R187 (fig 7). Effectively, this reduced disposable income by around 1.65% (fig 9). Instalments as a proportion of median take-home pay increased from around 32.7% to 33.8% (fig 8).
Middle income group: The median monthly installment grew by 3.3% or R300 (fig 7). Effectively, this reduced disposable income around 1.28% (fig 9). Installments as a proportion of median take-home pay increased from between 28% to 28.9% (fig 8).
Upper income group: The median monthly installment grew by 3.3% (fig 7). Effectively, this reduced disposable income by around 0.67% or R516 (fig 9). Installments as a proportion of take home pay increased from 16.9% to 17.5% (fig 8).
Standard Bank concludes that the lower income buyers take the biggest strain as a result of rising interest rates. This is because of generally higher installment payments as a percentage of income in this category.
Read more here: May print of HPI slows to 6.8% y.y