A first quarter “mini-surge” in quarter-on-quarter house price growth has led to a slight quarterly deterioration (increase) in the two key FNB Housing Affordability measures, i.e. the Average House Price/Per Capita Income Ratio Index as well as the Bond Installment Value on the Average House Price/Per Capita Income Ratio Index.
However, while quarter-on-quarter fluctuations in house price growth can be significant, on a year-on-year basis house price inflation remains firmly in lower single-digit territory, under performing Per Capita Disposable Income growth. This, along with the FNB expectation that interest rates will move sideways through the entire 2017, leads FNB to believe that the recent improving (declining) trend in the two FNB Housing Affordability measures will resume shortly.
Main home affordability ratios
For both credit-dependent as well as cash home buyers, the recent improving trend in home affordability since early in 2016 “stalled” in the first quarter of 2017.
Both of the two main FNB Housing Affordability measures showed a mild rise in the first quarter, implying some home affordability deterioration.
The first measure, namely the “Average House Price/Per Capita Disposable Income ratio Index”, rose (deteriorated) by a slight +0.4% in the 1st quarter of 2017 compared to the level for the previous quarter. This comes after four consecutive quarters of decline.
The second measure, namely the “Installment Value on a new 100% Bond on the Average Priced House/Per Capita Disposable Income Ratio Index”, also rose (deteriorated) by +0.4% in the first quarter after a prior decline.
Both of the two affordability indices were driven higher by a quarter-on-quarter house price growth rate of +1.7%, which outstripped quarter-on-quarter Per Capita Disposable Income growth of 1.4% in the first quarter.
However, FNB believes that this “mini-surge” in quarter on quarter house price growth was something of a “once-off”, soon to subside.
Viewing the more stable year-on-year growth rates for the individual drivers of the affordability ratios, FNB sees that Nominal Per Capita Disposable Income growth at a year-on-year rate of 5.6% far outstripped the 2.6% year-on-year growth rate in house prices during the first quarter of 2017.
FNB expects house price inflation to remain in lower single-digit territory, and have already seen slowing month-on-month growth rates in April/May which would soon point to a slowdown in quarter-on-quarter house price growth after the first quarter “surge”.
With interest rates expected to remain unchanged at current levels through the rest of 2017, FNB therefore believes that the first quarter rise in the two FNB Home Affordability Ratios was a temporary phenomenon, and that they will return to the declining (improving) trend in the near term.
Despite the first quarter’s slight rise, the Average Price/Per Capita Disposable Income Ratio Index remains -2.9% lower than its recent multi-year high reached in the final quarter of 2015. The Installment Value/Per Capita Disposable Income Ratio, too, is down on its multi-year high reached in the second quarter of 2016.
So how affordable is the housing market?
So how “affordable” or “in-affordable” is the housing market? The two 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 -25.2% down on its revised boom time high reached in the 1st quarter 2008, while the New Bond Installment/Per Capita Income Ratio is -41.7% lower than its first Quarter 2008 high point.
On the other hand, however, the House Price/Per Capita Income Ratio Index is still +22.4% above the first 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 Installment/Per Capita Disposable Income Index is actually still -4.5% below (more affordable than) the first quarter 2001 level.