Housing affordability improvements continued slowly in the final quarter of 2017, thanks to a weak national housing market.
Both of 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-Priced House/Per Capita Income Ratio Index, saw quarterly declines (improvements) in the fourth quarter. Important related affordability measures such as the Price-Rent Ratio and the all-important Household Sector Debt-Service Ratio have recently also shown further improvement (decline) too.
FNB Home Affordability Ratios
Both of the quarterly FNB Housing Affordability Ratios pointed to further residential affordability improvement in the final quarter 2017.
Mild affordability improvements through last year were a reflection of a weak housing market through 2017, resulting in slow average house price growth that could not keep pace with Per Capita Household Income growth, while interest rates assisted slightly in the third quarter by being lowered by twenty-five basis points last July.
For both credit-dependent as well as cash home buyers, home affordability improved slightly in the fourth quarter of 2017, continuing an improving national affordability trend which has been intact through 2016 and 2017, according to the two FNB Home Affordability Indices.
The first measure, namely the “Average House Price/Per Capita Disposable Income ratio Index”, declined (improved) by -1.1% in the fourth quarter of 2017, following on a -0.2% decline (improvement) in the previous quarter. This continues a broad declining (improving) trend that started in the first quarter of 2016. This Affordability Index has declined (improved) cumulatively by -5.4% since its 7-year high reached in the final quarter of 2015.
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 declined (improved) by -1.1%% in the fourth quarter of 2017, after a -1.9% decline in the prior quarter (with the third quarter of 2017 having had the additional affordability benefit of a lone twenty-five basis point interest rate cut).
This index has been on a broad improving (declining) trend since a seven-year high reached in the first quarter of 2016 (the quarter in which the last interest rare hiking cycle ended), and has declined by -5.4% cumulatively since then.
The continuation of the affordability improvements in the fourth quarter of 2017 came as a result of average house price growth under performing Per Capita Disposable Income of the Household Sector, the former rising by 4.9% year-on-year in that quarter, and the latter by 5.9%. As there were no interest rate movements in the final quarter of last year, both of the FNB Home Affordability Indices declined (improved) by a similar magnitude.
It is likely that this home affordability improving trend continued into the first quarter of 2018 too. FNB says this, because they already have average house price growth for the first quarter, which turned out to be a lowly 2.7% year-on-year. This is likely to have once again under performed Per Capita Income growth in that quarter.
In addition, a further twenty-five basis point interest rate cut took place in March, further enhancing affordability as we moved towards the second quarter of 2018.
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 pre-2008 boom time highs around 2006-2008. The Average House Price/Per Capita Disposable Income Index is -24.3% down on its revised boom time high reached in the first quarter 2008, while the New Bond Installment/Per Capita Income Ratio is -42% lower than its first Quarter 2008 high point.
On the other hand, though, the House Price/Per Capita Income Ratio Index is still +21.14% above the first 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 -7.1% below (more affordable than) the first quarter 2001 level.
South Africa’s currently low interest rates thus continue to assist in sustaining the relatively high real house price levels (by SA’s historic standards) that we currently experience.