The risks to the future stability of the housing market continued the declining (improving) trend during the first quarter of 2017. 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, but recently we have started to see some small improvement in Macroeconomic factors too.
Household Sector and Housing Market Risk continues its healthy decline
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 first quarter of 2008 to 73.2% by the first quarter of 2017, has lowered the vulnerability of the Household Sector significantly through lowering its sensitivity economic shocks and interest rate hiking. Given that much of this overall 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.
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 currently 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 continues to limit the possibility of residential “over-building” and thus over-supply.
The issue of still-significantly poor levels of home affordability still lingers. In this area, there have been upward revisions to the three home affordability risk measures, due to changes to the FNB Long Term House Price Index methodology. 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.
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. However, even here FNB sees signs of improvement emerging. From a Net Dis-savings Rate (Net Savings/Dis-savings being Gross Savings Net of Depreciation on Fixed Assets) of -2.3% of Household Disposable Income at a stage of 2013, the rate has diminished to -0.3% by the first quarter of 2017. It is now conceivable that FNB may return to positive net saving in the near future, something last seen prior to 2006.
Overall, therefore, behavior in the Household Sector and Housing Market itself has in recent times promoted a declining risk situation, a positive development from a Financial Sector stability point of view.
This is a dramatically improved situation relative 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 30.85 (scale of 0 to 60) in the first quarter of 2017, this index has declined for six consecutive quarters from 34.41 in the third 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 still 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. FNB have witnessed steadily rising Government indebtedness, with the Government debt-to-GDP Ratio reaching 51.7% in the final quarter of 2016, its highest level in the three-and-a-half decades over which the risk indices are compiled. This percentage declined slightly to 50.9% in the first quarter of 2017, but it remains a high percentage and, along with relatively low real interest rates, points to limited fiscal and monetary stimulus potential for the economy at present. However, one macro-economic risk improvement in recent times has come in the form of a noticeable narrowing in the Current Account Deficit on the Balance of Payments, from as wide as -6.2% of GDP in the second quarter of 2014 to -2.1% in the first quarter of 2017. This reflects a country living less beyond its means of late. This has been a key contributor to a mild decline in the
Macroeconomic Pressures Risk Index.
Nevertheless, the near zero-growth economy remains a high risk one, and these broader macroeconomic risks still pose a very significant risk to the level of future residential demand and thus the housing market’s health and stability. The Macroeconomic Risk Index, despite a small recent decline, remains firmly in the “high Risk” zone with a 7.41 rating.
Current Economic Pressures Risk has almost “treaded” water in recent quarters
Although economic growth remains weak, the SARB and OECD Leading Business Cycle Indicators for South Africa recently had a short period of quarter-on-quarter increase, pointing to the possibility of slightly better economic growth to come. This caused a more-or-less sideways move in the Current Economic Pressures Risk Index, for the past two quarters, recording a “Medium Risk” rating of 6.07 in the first quarter of 2017.
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 for a while looked likely to support something of a domestic mining recovery. Against this, however, the widely publicized negative news of ratings downgrades to “Junk Status”, along with recent news of a “technical recession” may have dented business and consumer confidence in the 2nd quarter.
This renewed dampening of sentiment could cause renewed current economic pressures.
Declining Composite Risk is largely due to factors within the Household Sector and Housing Market, and far less due to broader economy-wide factors.
Therefore, declining (improving) Residential Market risk is mostly due to key positive developments in terms of reducing vulnerability within the Household Sector and Housing Market itself. Broader economy-wide factors, although they have also just begun to see their risk ratings decline, remain far 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 revised index has, as a result, has declined from 18.13 at the end of 2015 to 17.07 (scale of 0 to 30) in the first quarter of 2017, a five consecutive quarter decline. However, due to high macroeconomic risk still prevailing, this composite risk index remains slightly within the “High Risk” zone.
In short, the overall Composite Household Sector, Housing Market and Economic Risk Index remains vastly improved since the all-time high (worst) of 20.01 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 very 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.