Residential Market risk continued to decline (improve) in the 4th quarter of 2016. This is mostly due to improvement in certain key household and residential-specific factors, such as the declining trend in the Household Debt-to-Disposable Income Ratio and low levels of risk of speculative activity and over-exuberant home buying. Risks to the broader macro-economy remained very high, but did begin to decline slightly
Residential market risk declines (improves) in recent quarters
The risks to the future stability of the housing market continued the declining (improving) trend during the 4th quarter of 2016. This was the continuation of a decline in risk levels through 2016. The risk improvement has been driven largely by a combination of Household Sector- and Housing Market-specific factors, which offset weak Macroeconomic factors.
Household Sector and Housing Market Risk on the decline and looking quite healthy
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 73.4% by the 4th 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 the low house price growth rate. 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 very wide cost gap between the more expensive new home building and existing home buying greatly limits the possibility of “over-building” and thus over-supply.
The issue of still-significantly poor levels of home affordability still lingers, although affordability is well off its highs of “in-affordability” of around 2007/8. Real home values, the house price-to-rent ratio, and the house price-to-per capita income ratio are all still at relatively high levels by long run historic averages.
But the most negative factor within the Household Sector and Housing Market, which still contributes negatively to Household Sector and Housing Market vulnerability, is the matter of a very low Household Sector Savings Rate.
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 27.54 (scale of 0 to 60) in the 4th quarter of 2016, this index has declined for 5 consecutive quarters from 31.82 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.
But the broader economy is where the big risks lie
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 51.7% 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. However, one macro-economic risk improvement came in the form of a noticeable narrowing in the Current Account on the Balance of Payments in the 4th quarter, to -1.7% of GDP, from a previous quarter’s -3.8% of GDP, thus reflecting a country living less beyond its means of late. This caused a slight decline in the Macroeconomic Pressures Risk Index.
Nevertheless, the near zero-growth economy remains at high risk, and these broader macroeconomic risks still pose a very significant risk to the level of future residential demand.
Current Economic Pressures Risk looks to be diminishing mildly
Although economic growth remains weak, the SARB and OECD Leading Business Cycle Indicators for South Africa have been trending higher in recent months, suggesting stronger economic growth to come. The alleviation of drought conditions in much of the country bodes well for the Agriculture part of the economy, while mildly stronger global commodity prices in recent times could support something of a domestic mining and manufacturing recovery.
The signs are not for a strong economic recovery, but rather a mild one, and we have started to see a slight decline in the “Current Economic Pressures” Risk Index.
Declining Composite Risk is largely due to factors within the Household Sector and Housing Market, and far less due to broader economy-wide factors.
In short, though, 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. Broader economy-wide factors, although they have also just begun to see their risk ratings decline, remain the more 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 sluggish economy exerting significant pressure on it.
Therefore, 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.
This overall index has, as a result, moved firmly into the “Medium Risk” zone in recent quarters (previously in the High Risk zone), having seen a noticeable decline (improvement) from a multi-year high of 17.32 in the final quarter of 2015 to 16.05 (Scale of 0 to 30) by the 4th quarter of 2016.
In short, the overall Composite Household Sector, Housing Market and Economic Risk Index remains vastly improved since the all-time high (worst) of 19.825 reached at a stage early in 2006, due to major improvements within the Household Sector and Housing Market itself. But it could be significantly lower today if not for high levels of Macroeconomic Risk. The most significant risk to the housing market thus emanates from outside of the market, in the broader economy. This is different to the 2006 days where a housing market bubble meant that the Residential Sector was far more responsible for its own high level of vulnerability/risk.