Property Barometer – Residential Property Affordability Review

Perhaps surprisingly, both of the quarterly FNB Housing Affordability Ratios pointed to a slight residential affordability deterioration in the first two quarters of 2017, despite relatively slow average house price growth.

These slight affordability deteriorations are a sign of the stagnant economic phase of the economic super-cycle in which South Africa finds itself, in which Household Sector Disposable Incomes are battling to outpace even modest house price growth.

For both credit-dependent as well as cash home buyers, home affordability has deteriorated very slightly in the first two quarters of 2017, according to the two FNB Home Affordability Indices.

The first measure, namely the “Average House Price/Per Capita Disposable Income ratio Index”, rose (deteriorated) by a slight +0.6% in the second quarter of 2017, following on a +0.3% revised increase in the first quarter, the second consecutive quarter of increase.

The second affordability 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 +0.6% in the 2nd quarter after a +0.3% rise in the first quarter, the same magnitudes as the former index due to there being no interest rate changes in the first half of this year.

This slight deterioration in home affordability may appear a little strange, given that on a year-on-year basis, Per Capita Disposable Income growth was 5% as at the second quarter while average house price growth was a lesser 3.2%.

However, on a quarter-on-quarter basis, average house price growth rates of 1.3% and 1.8%, for the 1st and second quarter of 2017 respectively, outstripped Per Capita Disposable Income growth of 1% and 1.2% for the same two quarters respectively.

The weak Per Capita Disposable Income quarter on quarter growth rates suggest the possibility that year-on-year growth in Per Capita Disposable Income may be set to slow into low single digits, which would require even slower house price growth, or alternatively house price decline, if affordability were to improve noticeably from here on.

FNB does expect average house price inflation to under perform Nominal Per Capita Disposable Income growth, given the likelihood of very weak Household Sector confidence levels prevailing, and thus anticipate gradual home affordability improvement over the coming years. But the most recent affordability index readings point to just how financially challenging the economic environment of South Africa is becoming, with even very slow low single-digit house price growth not necessarily leading to affordability improvements, as economic growth stagnates and various household-related taxes and tariffs rise.

One source of slight relief for households, though, has been a 25 basis point interest rate cut at the July Monetary Policy Committee (MPC) meeting of the SARB (South African Reserve Bank), and one more 25 basis point rate cut is expected before the end of this year. This is expected to lower the Bond Instalment/Per Capita Disposable Income Ratio Index in the third quarter of 2017.

So how affordable is the housing market? Very low interest rates have been key to sustaining home affordability in recent years.

So how “affordable” or “in-affordable” is the housing market? The two affordability measures are still vastly improved (down) on their late pre-2008 boom time highs around 2006-2008. The Average House Price/Per Capita Disposable Income Index is -22.5% down on its revised boom time high reached in the first quarter 2008, while the New Bond Installment/Per Capita Income Ratio is -39.5% lower than its first Quarter 2008 high point.

On the other hand, however, the House Price/Per Capita Income Ratio Index is still +24.08% above the 1st quarter 2001 “pre-boom” level, so it is still far from “cheap”. But keeping property values 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 -3.22% below (more affordable than) the first quarter 2001 level.

South Africa’s currently low interest rates thus remain key to sustaining the relatively high real house price levels (by SA’s historic standards) that we currently experience.

Read more here: FNB Property Barometer Residential Affordability Sept 2017