Softening labour market stokes affordability concerns

· SBR’s HPI slowed to 6.3% y/y in November, from a slightly upwardly revised 6.9% y/y in October (originally 6.8% y/y). Sub-indices show that freehold properties slowed to 8.4% y/y, from 8.9% y/y in September; and sectional title properties slowed to 7.6% y/y, from 8.1% y/y in September.

· The weighted median price per square metre (of both freehold and sectional title properties) rose slightly, by 0.3% m/m to R4,400, from R4,385 in October. The per square metre prices seem to have recovered the losses suffered in August 2016 after the local government elections when prices dropped from R4,360 in July to R4,170 in August, or -4.3% m/m.

· 2016 is set to become the worst-performing year for residential property since at least 2012. 2016 YTD house prices per m2 are up only 5%, compared with 14% in 2015. The HPI has under performed by 3% versus 2012, 19% versus 2013 and 9% versus 2014 and 2015 respectively.

· The median price of a freestanding house applied for and approved by Standard Bank was R1,000,000 in November, up from R950,000 in October 2016. The median price of a flat/townhouse was R799,900, down slightly from R800,000 in October. The weighted median price of the two was R910,095, up from R904,750, in October, or 0.6% m/m (fig 2).

· Growth in house prices has been moderating for the past five months on tougher economic conditions and reduced consumer and business confidence as political uncertainty has increased The labour market softened further in Q3; unemployment rose to a historical high of 27.1%. Quarter-on-quarter, a total of 288,000 jobs were added, although not enough to accommodate the labour force which grew by 527,000 people in Q3 (see our note Q3 unemployment 27.1%, highest since 2008 published on 23 Nov 2016).

· Salaries and wages are a primary source of income for 63% of SA households, highlighting the importance of a healthy labour market and the lack of income diversification. Low-emerging middle income households (earning between R89,001 and R202,500 p.a.), emerging middle income households (earning between R202,501 and R412,000 p.a.), and realized-middle income households (earning between R412,001 and R707,000 p.a.) are the most affected by labour market turbulence as they have an even higher dependence on salaries as a primary source of income; 84% to 89% of their income is sourced from salaries. Using Standard Bank’s applications data, we estimate that these groups account for roughly 75% of mortgage demand.

· Affordability is expected to continue impacting adversely on the demand for and supply of mortgages, and ultimately on property prices. Although improved moderately from Q2, the MMI/BMR Consumer Financial Vulnerability Index (CFVI) for Q3:16 shows that consumers spending more than what they earn, coupled with too much existing debt and poor financial planning, are the main reasons for consumer financial vulnerability levels.

·SARB data showed that household credit growth slowed to 1.0% y/y in October, from 1.2% y/y in September. Within household credit, mortgage advances (60% of total) slowed for the fourth consecutive month to 3.4% y/y from 3.7% y/y.

· Standard Bank believes that purchasing activity will continue to point to subdued demand due to rising political uncertainty, slowing growth of disposable income, a tightening labour market, and tight financial conditions. We expect consumers to remain under pressure into 2017, with household expenditure only recovering in Q3:17 once the SARB starts cutting interest rates. Commensurately, we remain bearish on property prices for the remainder of 2016 and into 2017.

Read more here: Standard Bank November HPI 2016