House affordabiloty levels improve

NELSPRUIT – The FNB Estate Agent Survey points to the sample of agents surveyed, perceiving housing affordability levels (house prices relative to income levels) as having improved significantly since 2008, to levels comparable with those seen around 2004.

These perceptions are not totally out of line with our own FNB housing affordability measures, which improved dramatically from 2008 to 2011, driven by period of low house-price growth being slower than wage inflation, along with significant interest rate cuts at the time.

However, the improving affordability trend may have all but come to an end more recently. The September SARB (South African Reserve Bank) Quarterly Bulletin has enabled us to update our own two housing affordability indices for the first quarter of 2013, using the SARB Average Employee Remuneration Index, the FNB House Price Index, and a Prime Rate time series.

And indeed, the improving trend in affordability since 2008 has all but ended according to these two affordability measures too. The first measure, namely the Average House Price/Average Employee Remuneration Index rose (deteriorated) very slightly by 0,2% in the first quarter of 2013, compared to the level for the previous quarter. The second measure, which captures the Instalment Repayment Value on a new 100% Bond on the Average Priced House/Average Employee Remuneration Ratio in index form, also rose (deteriorated) by a slight 0,2%. This slight deterioration comes on the back of a lack of any further meaningful improvement since 2011, following a steep decline (improvement) in both affordability indices from 2008 to 2010.

This lack of further affordability improvement is due in part to the slowdown in the pace of SARB interest-rate cutting post-2009, slower employee remuneration growth subsequent to 2010, and also due to an improved period of house price growth in 2012.

In addition, debt-service affordability improvements also appear to have come to an end. Almost in sync with the big housing affordability adjustment from 2008 was a very significant improvement in the affordability of servicing the household debt-burden, as reflected in the household sector debt-service ratio (the cost of servicing the debt expressed as a percentage of household disposable income).

However, simultaneous with the end of the improving home affordability trend since around a year ago, came the end of the improving trend in the debt-service ratio too. At 7,7% (interest only debt-service ratio), the debt-service ratio as calculated by the SARB is now also slightly up from a low of 7,6% as at the final quarter of 2012.

The slight increase in the ratio has much to do with a household debt-to-disposable income ratio which has risen recently again slightly, following a decline from 2009 to 2011, as slow economic and household disposable income growth fails to outpace also-mediocre household-sector credit growth.

And, of course, we haven’t had an interest rate cut in over a year.

These apparent ends to both housing and debt-servicing affordability improvements lead us to believe that 2014 will see some deceleration in residential demand growth (still growing, but slower), as well as a mildly slower house-price growth year in the expected absence of any key factors that could meaningfully improve housing or debt affordability. No significant acceleration in average employee remuneration growth is foreseen in these mediocre economic times, while interest rates are expected to remain at current levels through 2014.

Indeed, house price growth in the first three quarters of 2013 is already below the 8% year-on-year high reached in the third quarter of 2012, at 6,4% year-on-year in the second quarter of 2013, perhaps already reflecting the constraining influence of a lack of improvement in the abovementioned affordability measures.

Some may find it strange that we point to affordability measures back down at relative lows last seen around 2003/4, but yet those years were a time of extreme house-price growth whereas the current period is definitely not. We believe that there is a good explanation for this, and it relates to a very different market psychology now, compared with then. Around 2003 to 2005, there was far stronger evidence of speculative property buying as well as far higher levels of buy-to-let purchasing than in more recent times. In addition, we believe that there was significantly more “buyer panic” then than now, which increased the sense of urgency of aspirant new entrants to the market, believing that if they “didn’t buy now” it might be too expensive later.

Neither of these features seem prevalent in the current market environment, and this is largely due to what happened in previous years The pre-boom interest rate cuts from late-1998 came at a time where property prices were extremely affordable, thus initially precipitating massive demand surge and strong primary residential demand-driven price growth, which would later attract speculators and less sophisticated buy-to-let buyers to the market in large numbers, along with some “panicky buyers”.

By comparison, the sharp post-boom interest rate cuts from late-2008 precipitated a far less extreme demand surge because they came at a time when housing was at a relatively unaffordable level. Therefore, the initial demand growth post-2008 was never going to be strong enough to achieve price growth momentum that could attract such groups of people in significant numbers. Today, it remains a very “sane” market, low on speculative and buy-to-let buying, and where buyers shop around and bide their time. Therein lies the key reason for such a difference in price growth performance between the present and a decade ago, despite similar affordability levels.

A few “secondary” explanations for the difference in price growth between then and now, also emanate from certain other affordability measures. These point to a deterioration in affordability in some key housing-related costs in the form of municipal rates and utilities tariffs, weighing mildly on housing demand, while competing expenditure items in the form of consumer goods and services, have significantly improved their affordability since a decade ago, thus making housing less price competitive over the past decade or more.