Property Barometer – Residential Market Stability Risk Review

The risks to the future stability of the housing market continued the improving trend during the 3rd quarter of 2016. This is the continuation of a decline in risk levels since late in 2015. The risk improvement has been driven by a combination of Household Sector- and Housing Market-specific factors, which offset weak Macroeconomic factors.

On the Household Sector side, the ongoing decline in the Household Sector Debt-to-Disposable Income Ratio, all the way from 87.8% as at the 1st quarter of 2008 to 74% by the 3rd quarter of 2016, has lowered the vulnerability of the Household Sector significantly through lowering its sensitivity especially to interest rate hiking. Given that much of this indebtedness decline is due to a decline in the Household Mortgage Debt-to-Disposable Income Ratio too, this contributes significantly to lower residential market vulnerability to economic and interest rate “shocks”.

In addition, there exists a low and diminishing risk of speculation and “over-exuberance” in the market, due to interest rates that have risen gradually since 2014 to a percentage significantly above now-lowly house price growth. Slow Household Disposable Income growth is also a positive in the sense that it contains consumer confidence and promotes conservative household spending. These factors are not good news from a market strength point of view, but are positives in terms of limiting any risk build up in the market that can come from “over-exuberant” property buying and the financial over-commitment that this can bring.

In addition, a significant and widening cost gap between the more expensive new home building and existing home buying greatly curtails any possibility of “over-building” and thus over-supply.

There are 2 factors within the Household Sector and Housing Market which still contribute negatively to Household Sector and Housing Market vulnerability. Firstly there is the matter of a dismally low Household Sector Savings Rate. And secondly is the issue of still relatively poor levels of home affordability, with real home values, the house price-to-rent ratio, and the house price-to-per capita income ratio all at what are high levels by long run historic averages.

Overall, though, behavior in the Household Sector and Housing Market itself has in recent times promoted a “Medium Risk” situation, and indeed a declining risk situation, all in all a very positive development from a Financial Sector stability point of view.

This is a dramatically improved situation to the extremely high risk situation created by the housing bubble back around 2007/2008. The Composite Household Sector and Housing Market Risk Index, which excludes broader Macroeconomic Risks emanating from outside of the Residential Market, remains very much in “Medium Risk” territory and declining steadily. At a level of 29.36 (scale of 0 to 60), this index has declined for 4 consecutive quarters from 33.45 in the 3rd quarter of 2015

However, the state of the country’s broader economy is where the very significant risks to the Housing Market still linger, it would appear, with large Macroeconomic imbalances having built up.

Economic growth has been stagnating for some years, and as this happens, the social tensions mount, raising the risk of greater instability and economic disruption. Steadily rising Government indebtedness, with a 50.9% Government debt-to-GDP Ratio reaching its highest level in the 3-and-a-half decades over which the risk indices are compiled, along with relatively low real interest rates, point to limited fiscal and monetary stimulus possibilities for the economy at present. In addition, the country as a whole already lives well beyond its means, as reflected in a wide Current Account Deficit of -4.1% of GDP.

So the near zero-growth economy, which is major imbalances, is in a corner, and this poses very significant risk to the level of future residential demand.

Right now, economic growth remains under pressure, although possibly looking to turn slightly stronger. The OECD Leading Indicator for South Africa remained in year-on-year decline in the 3rd quarter of 2016. This rate of decline had diminished slightly, however, and there have been some moderately encouraging signs for some improvement in economic growth in 2017, including moderately higher global commodity prices to support domestic exports, and domestic drought conditions which look like being alleviated. But little points to a strong recovery, and economic mediocrity has a potentially constraining impact on near term residential demand.

In short, declining (improving) Residential Market risk is mostly due to key positive developments in terms of reducing vulnerability in the Household Sector and Housing Market itself, whereas broader economy-wide factors remain the negative contributors.

The broader “Macroeconomic” factors suggest that, even if the residential market remains “well-behaved” in terms of a healthy lack of “irrational” and “over-exuberant” behavior, there can be no guarantees against South Africa’s ailing economy exerting significant pressure on it.

Nevertheless, the risk improvements made in the Household Sector and Housing Market are the dominant influence in the overall Composite Household Sector, Residential Market and Economic Risk rating, the over-riding risk index which incorporates Household Sector, Housing Market and Macroeconomic Risk Indicators.

Therefore, this overall index, too, has seen a decline (improvement) from a multi-year high of 17.89 in the final quarter of 2015 to 16.98 (Scale of 0 to 30) by the 3rd quarter of 2016.
This Composite Index, however, remains on the border of the “High Risk” zone, having moved to just inside the “Medium Risk” zone in the 3rd quarter of 2016, kept relatively high by the risks existent in the broader economy at present.

In short, so the overall Composite Household Sector, Housing Market and Economic Risk Index remains vastly improved since the all-time high (worst) of 20.25 reached at a stage of stage of 2006, due to major improvements within the Household Sector and Housing Market itself. But it still remains on the high side due to the high level of broader economy-wide risks that have built up in recent years.