For both credit-dependent as well as cash home buyers, the home affordability picture began to improve slightly in the 3rd quarter of 2016, after a gradual multi-year deteriorating trend that began back around 2013.
Both of FNB’s 2 main affordability measures showed a mild decline in the 3rd quarter, implying some home affordability improvement.
The 1st measure, namely the “Average House Price/Per Capita Disposable Income ratio Index”, declined (improved) very slightly by -0.98% in the 3rd quarter of 2016 compared to the level for the previous quarter, the 3rd consecutive quarter of decline.
The 2nd measure, namely the “Installment Value on a new 100% Bond on the Average Priced House/Per Capita Disposable Income Ratio Index”, also declined (deteriorated) by -0.98% in the 3rd quarter, its 1st quarter of decline following the prior rising trend.
Both of the 2 affordability indices were driven lower in the 3rd quarter by a slowing average house price inflation rate, from 6.8% year-on-year in the 2nd quarter (1.2% on a quarter-on-quarter basis) to 4.6% in the 3rd quarter (0.4% quarter-on-quarter).
Simultaneously, there has been no further interest rate movement since the 1st quarter of 2016, meaning that interest rates played no role in the movement of the Loan Instalment/Per Capita Disposable Income Ratio.
Examining the longer trends, the recent improvements in home affordability don’t yet negate the cumulative deterioration of the past few years. The cumulative result of house price growth broadly outperforming per capita income growth since 2013 up until early-2016, has been a +3.1% cumulative deterioration (rise) in the Average Price/Per Capita Disposable Income Index from the 1st quarter of 2013 to the 3rd quarter of 2016. Add to that the past 2 years of interest rate hikes, and over the same period the Instalment/Per Capita Disposable Income Index has risen (deteriorated) by a more significant +18.6%
How affordable is the housing market?….still relatively high by pre-boom levels, but significant down on 2006-8 boom time highs.
So how “affordable” or “in-affordable” is the housing market? The 2 affordability measures are still vastly improved (down) on their late-boom highs around 2006-2008. The Average House Price/Per Capita Disposable Income Index is -24% down on its boom time high reached in the 2nd quarter 2006, while the Installment/Per Capita Income Ratio is -40.7% lower than its 1st Quarter 2008 high point.
On the other hand, however, the Price/Per Capita Income Ratio Index is still 24.2% above the 1st quarter 2001 “pre-boom” level. But keeping property still “temporarily” comparative affordability-wise to early-2001 has been a period of abnormally low interest rates in recent years, which has meant that the Loan Instalment/Per Capita Disposable Income Index is actually still -3.16% below (more affordable than) the 1st quarter 2001 level.
The drivers of the 2 key affordability ratios
FNB may be at the stage where the rising trend (deterioration) of recent years in the 2 FNB Affordability Indices has come to an end for the time being.
The Residential Market has slowed considerably in recent quarters, translating into slowing average house price inflation.
By the final quarter of 2016, average house price inflation had slowed to a mere 1.9%.
Whilst FNB does not yet have 4th quarter per capita disposable income growth data, it is unlikely that this growth would be as slow in nominal terms as the most recent house price growth estimates. In addition, interest rates play a neutral role with no further moves in rates to date.
This leads to the expectation that FNB will see a continuation of the affordability improvements in the 4th quarter 2016 data, and probably even beyond that into 2017.
In addition, the time may have arrived for improvement to commence in certain other key affordability measures. These include the Real House Price measure (house prices relative to consumer goods and services price levels), the Price-Rent Ratio, and the Household Debt-Service Ratio.