Research

Property Barometer – Residential Market Risk Review

Key points:

  • Overall risk to the future stability of the housing market rose slightly in the first quarter of 2018, after moving broadly sideways through 2017.
  • On the household sector side, a rise in the Household Sector Debt-to-Disposable Income Ratio is a negative factor in terms of raising housing market vulnerability.
  • Very weak household savings remains a long-term negative for housing market risk, and recently the savings rate has begun to deteriorate again.
  • House prices remain relatively high by historic standards, and the Housing Affordability Risk Index remains in the “high risk” zone.
  • A key positive is that there exists a low risk of speculation and “over-exuberance” in the market, due to interest rates that are higher than the relatively low house price inflation rates, along with moderate household disposable income growth.
  • Putting all of the key household sector and housing market-specific indicators together to form the Composite Household Sector and Housing Market Risk Index, FNB sees  that the housing market itself is greatly improved (lower) since a decade or more ago, but has deteriorated (risen) slightly in the first quarter of 2018. This Composite Housing Market Risk Index remains within what FNB calls “medium risk” territory at 32.21 (scale of 0 to 60).
  • The state of the country’s broader economy is what continues to pose significant risks to the housing market, however, with big macroeconomic imbalances having built up. These include a relatively high government debt burden, already-low real interest rate levels at a time when the economy hardly grows, and a widening current account deficit.
  • Therefore, the composite Housing Market Vulnerability Index, the over-riding risk index which incorporates household sector, Housing Market and Macroeconomic Risk, remains in the High Risk zone (due to Macroeconomic Risks), and deteriorated (rose) mildly in the firsst quarter of 2018 from 17.29 previous to 17.43 (scale of 0 to 30).

Overview: progress in the lowering of residential market vulnerability has ‘stalled’

The risks to the future stability of the housing market deteriorated (increased) mildly during the first quarter of 2018, following a lack of progress in improvement since early-2017.

Household sector and housing market-specific risk increases (deteriorates) slightly

A recent slowing in the pace of decline, and then a first quarter 2018 increase, in the Household Sector Debt-to-Disposable Income Ratio, has been a negative development in terms of lifting the household sector’s and housing market’s vulnerability to unwanted economic and interest rate shocks. The Debt-to-Disposable Income Ratio had declined all the way from 87.8 as at the first quarter of 2008 to 71.2 by the fourth quarter of 2017. However, the pace of decline had been slowing since late-2016, and then rose mildly to 71.7 in the first quarter of 2018.

This turn in the momentum of the Debt-to-Disposable Income Ratio has led to a rise (deterioration) in the all-important Household Debt-Service Risk Index over the past four quarters, from a multi-year low of 5.14 as at the first quarter of 2017 to 5.43 in the first quarter of 2018 (scale of 0 to 10).

The Debt-Service Risk Index remains in the “medium risk” zone, but has trended towards the upper limit of this zone, which borders on the “high risk” zone.

Within the household sector and housing market, there are certain sub-indices which remain in “high risk” territory. Notable here is the ongoing dismal state of household sector savings, which although improved from a few years ago remains at very low levels not conducive to building up strong financial “buffers”. In addition, housing market affordability risk remains high, with real house price levels in South Africa still high by historic standards.

However, key positive (low) risk contributors relate to constrained new housing supply and a lack of any noteworthy risk of speculative or “over-exuberant” behavior in the market. Speculators can be a key risk to market stability, trying to take advantage of cheap credit and a strong price growth trend. There is little of this at present, with house price growth firmly rooted in single-digit territory and, importantly, well-below the mortgage borrowing rate. Disposable income growth remains moderate and slowing, so there is little risk of “over-exuberant” home buying and investment that can often arise in times of major household income “windfalls”.

With regard to new housing supply, a positive risk factor is that the residential development market remains slow due to a widening in the gap between the cost of building new homes and the average price of existing homes.

Overall, taking the above factors into account, the Composite Household Sector and Housing Market Risk Index is placed firmly within the “Medium Risk” Zone, but a deterioration in the Household Debt-Service Risk Index has been a key factor contributing to a slight rise (deterioration) in this Composite Index.

It rose (deteriorated) slightly in the first quarter of 2018 to 32.21 (scale of 0 to 60), from 31.87 in the prior quarter, and from a 31.62 multi-year low in the second quarter of 2017.

Despite this recent deterioration, however, the index level remains sharply improved since the all-time high (worst) risk level of 46.390 reached in mid-2006 at the height of the pre-2008 housing bubble.

But the broader economy is still where the big risks still lie

The “imbalances” and growth risks threatening the country’s broader economy remain where the very significant risks to the housing market still lie.

After mild improvement in a still-stagnant economic growth rate through 2017, to 1.5% year-on-year as at the final quarter, renewed weakening emerged in the first quarter of 2018, year-on-year growth in that quarter slowing to an anemic 0.75% . The more positive sentiment early in the year, largely as a result of key political leadership changes in the country, was short-lived, and the country’s policy direction remains uncertain.

This weak economic environment sustains the risk of elevated social tensions, greater instability and economic disruption. FNB has witnessed steadily rising government indebtedness over the past decade, with the Government Debt-to-GDP Ratio reaching 53% in the fourth quarter of 2017, its highest level in the three-and-a-half decades over which the risk indices are compiled. It did admittedly recede slightly in the first quarter of 2018 to 52.7%, but this decline is not significant. High Government Debt, along with relatively low real interest rates, points to limited fiscal and monetary stimulus potential for the economy at present. Then, a noticeable deterioration of late has come in the form of renewed widening in the Current Account Deficit on the Balance of Payments, from -2.1% of GDP in the third quarter of 2017 to -4.8% in the first quarter of 2018. This reflects a country living increasingly beyond its means of late, and the most recent deficit is significant.

This weak growth economy, with its significant imbalances, therefore remains a “high risk” one, and these broader macroeconomic risks still pose a key risk to the level of future residential demand and thus the housing market’s health and stability.

The Macroeconomic Risk Index rose in the first quarter of 2018 from 7.50 previous to 7.63. It is at its worst (highest) level in the history of the Index, which dates back to 1980, and remains rooted firmly in the “high risk” zone.

Current Economic Pressures Risk subsides (improves) in the first quarter of 2018

Although economic growth remains weak, the OECD Leading Business Cycle Indicator for South Africa has recently been rising year-on-year, pointing to the possibility of slightly better economic growth to come in the near term. This has meant that the Current Economic Pressures Risk Index subsided in the first quarter of 2018, thus making it a mildly positive contributor to the broader housing market risk picture. Therefore, while the big macroeconomic imbalances, as reflected in the Macroeconomic Risk Index, are a key negative to overall housing market stability, near term cyclical economic risks appear to have been alleviated somewhat, and remain in “medium risk” territory at a level of 5.26 (scale of 0 to 10) in the first quarter of 2018, down from 5.45 in the prior quarter.

While the Leading Business Cycle Indicator was still rising year-on-year recently, it runs the risk of “over-forecasting”. This is because the non-cyclical Agriculture Sector’s GDP growth comes off a very high base in 2017, having surged strongly last year on the back of the end of the national drought earlier last year.

It is possible, therefore, that a tapering agriculture growth rate in 2018 could constrain overall economic growth this year.

Also important to note is that so-called “Ramaphoria” appears to have passed on, with both business confidence as well as the FNB Estate Agent Survey Activity Rating falling back noticeably in the second quarter, after first quarter surges.

The Composite Housing Market Vulnerability Index thus rose (deteriorated) slightly in the first quarter of 2018, thanks to quarterly increases (deteriorations) in the Composite Household Sector and Housing Market Risk Index, as well as the Macroeconomic Risk Index, while these rises were partly offset by a decline (improvement) in the Current Economic Pressures Risk Index.

The Index saw a rise (deterioration) from 17.29 (Scale of 0 to 30) in the previous quarter to 17.43 in the first quarter of 2018. This level is now mildly higher (worse) than the multi-year low of 17.36 reached in the first quarter of 2017, but still well down on the all-time high of 20.06 reached in the first quarter of 2006.

Read more here: FNB Property Barometer – Residential Market – Macro Stability Review