The declining (improving) trend in Residential Market Stability Risk “stalled” in the second quarter of 2017, after having made some good progress through 2016.
The slight deterioration in the market’s stability risk was driven by some small deteriorations in both Household and Housing Market “internal” fundamentals as well as due to mild deterioration in broader Macroeconomic risks. When it comes to the current level of overall Housing Market Stability Risk, however, the key threats emanate more from the broader economy than from the housing market’s own “home grown” fundamentals.
Recent improving trend in residential market risk ‘stalled’ in second quarter 2017
The risks to the future stability of the housing market increased (deteriorated) slightly during the second quarter of 2017. This was a change following a recent improving trend through 2016 until early- this year. This slight risk deterioration in the second quarter has been driven largely by economic factors which have lifted Macroeconomic risks to the housing market slightly in the quarter, while also exerting pressure on Household Sector Nominal Disposable Income growth, making savings rate and Debt-to-Disposable Income Ratio improvements tougher going of late.
Household Sector and Housing Market Risk declining trend “stalls” in the second quarter
On the Household Sector side, the declining trend in the Household Sector Debt-to-Disposable Income Ratio, all the way from 87.8% as at the first quarter of 2008 to 72.6% by the second quarter of 2017, continued. This significant decline over the past nine years has lowered the vulnerability of the Household Sector significantly through lowering its sensitivity to 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 compared with back around 2008.
However, the multi-year declining trend in our Household Sector Debt-Service Risk Index through 2013-2016 was stalled in the first half of 2017. The Index has risen (deteriorated) for the first two quarters of 2017, from 5.14 (scale of 0 to 10) at the end of 2016 to 5.23 in the second quarter of 2017 despite the ongoing decline in the Debt-to-Disposable Income Ratio. The upward pressure in the Index came from a recent slowing pace of decline in the Debt-to-Disposable Income Ratio, which is reflective of downward pressure on Nominal Disposable Income growth by economic weakness, making indebtedness reduction by the Household Sector tougher going in recent times.
In the second quarter, FNB also saw this pressure on Disposable Income manifest itself in a slight decline in the Household Sector savings rate, after prior mild improvement.
The income growth pressure also exerted some slight upward (deteriorating) pressure on home affordability measures, and thus the Housing Affordability Risk Index, due to quarter-on-quarter Per Capita Income growth not keeping pace even with pedestrian house price growth.
But in terms of “internal” sources of Housing Market risk (those risks emanating from the Housing Market itself), there still exist plenty of positives in the form of a very low risk of speculation and “over-exuberance” in the market, due to Household Sector confidence levels remaining very weak in tough economic and uncertain political times. This lack of confidence, along with slow Household Disposable Income growth, is 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.
Overall, behavior in the Household Sector and Housing Market itself has in recent times promoted a far lower (better) risk situation compared to the dire situation around 2006 at the height of the housing bubble. But recently, economic pressures brought to bear on Household Sector finances, appear to have “stalled” further improvement.
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 at a level of 31.53 (scale of 0 to 60) in the 2nd quarter of 2017. This is far below the 2006 all-time high of 46.403. However, it is slightly up from the first quarter revised 31.46.
But, while the housing market’s “home grown” risks appear “acceptable”, the state of the country’s broader economy is where the very significant threats 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. We have witnessed steadily rising Government indebtedness, with the Government debt-to-GDP Ratio reaching 51.6% in the second quarter of 2017, its highest level in the three-and-a-half decades over which the risk indices are compiled. This high Government Debt percentage, which represented a renewed deterioration (increase) on the previous quarter, 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 2nd quarter of 2014 to -2.4% (admittedly slightly worse than the -2.1% of the prior quarter but nevertheless significantly improved in recent years) in the second quarter of 2017. This reflects a country living less beyond its means of late.
Economic growth in the second quarter improved very slightly, but remains very weak at 1.1% year-on-year. Globally, interest rates remain very low in the likes of the all-important USA, implying little monetary stimulus ammunition, and this too contributes to a high Macroeconomic Risk Rating for South Africa.
Therefore, the Macroeconomic Risk Index, remains firmly in the “high Risk” zone with a 7.45 (scale of 0 to 10) rating, which reflects a slight increase on the first quarter’s 7.43.
And as the OECD Leading Business Cycle Indicator for South Africa continues its decline, suggesting near term economic growth weakening to come, the Current Economic Pressures Risk Index continued to rise (deteriorate) in the second quarter, from 6.13 previous to 6.46, and while still in “Medium Risk” territory is nearing the “High Risk” zone boundary.
The fact that Overall (Composite) Risk remains in the “High Risk” zone is due to broader economy-wide fundamentals, whereas the factors within the Household Sector and Housing Market are less “threatening”.
The Composite Household Sector, Residential Market and Economic Risk Rating remains rooted in “High Risk” territory with a reading of 17.44 (scale of 0 to 30) in the second quarter of 2017. This reading was slightly higher than the 17.31 of the previous quarter, driven up by quarterly increases in all three of the key components, namely the Composite Household Sector and Housing Market Risk Index, the Current Economic Pressures Index as well as the Macro-Economic Risk Index.
The most recent level does remain far improved on the all-time high Composite Risk Rating of 20.07 reached in the first quarter of 2006, albeit still in the “High Risk” zone.
The major improvement decline) that has been achieved in the Composite Risk Rating is mostly due to key positive developments in terms of reducing vulnerability within the Household Sector and Housing Market itself. Broader economy-wide factors, in contrast, remain far more negative contributors, and are responsible for the Composite Risk Rating remaining in “High Risk” territory.
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 stagnant economy exerting significant pressure on it. The slight second quarter 2017 increase in the Composite Risk Rating, however, was due to mild risk deteriorations both in the Household and Housing Market fundamentals as well as in the broader Macroeconomy.