Residential Affordability - FNB Property Barometer

After a few years of improvement it appears that the “residential affordability cycle” may be slowly turning the corner in the direction of a slight deterioration in affordability.

This however does not mean that the overall property affordability picture is weak, but with house price growth, the rising interest rate and the average employee remuneration growth struggling, it is only natural that the cycle would change as well.

John Loos, First National Bank’s (FNB) Property Economist writes that there are key factors to evaluate to assess home affordability. He says that the key factors to evaluate against incomes and interest rate levels are house price trends, rates and tariffs trends, maintenance and repair cost trends, affordability relative to “rival” consumer goods and services, and of course the cost of credit given that the residential market is so credit-dependent.

Further adding that the June SARB Quarterly Bulletin enabled them to update their own 2 housing affordability indices for the 4th quarter of 2013, using the SARB Average Employee Remuneration Index, the FNB House Price Index, and a Prime Rate time series. 

As at the 4th quarter of last year, the improving trend in affordability that had started in 2008 appeared to have all but ended, and they saw a very slight deterioration in the 2 affordability measures.

Of their 2 affordability measures, the 1st measure, namely the Average House Price/Average Employee Remuneration Index rose (deteriorated) mildly by +2.4% in the 4th quarter of 2013 compared to the level for the previous quarter. The 2nd measure, namely the “Instalment Payment Value on a new 100% Bond on the Average Priced House/Average Employee Remuneration Ratio” Index, also rose by +2.4% in the 4th quarter, with both indices being driven slightly higher by house price growth exceeding growth in average employee remuneration.

At this stage, however, the quarterly rise is very small, and the affordability levels still far improved on the highs of “in-affordability” experienced back around 2007/8. The cumulative decline (improvement) in the 2 affordability indices since their 2007/8 peak levels are -32.4% in the case of the Average Price/Income Ratio Index and -53.2% in the Instalment/Income Ratio Index.

In 2014, as the data points become available, it is possible that we may see all 3 of these affordability measures deteriorating mildly, with wage bill growth under pressure in a weak economy, house price growth having started the year higher than employee remuneration growth, and interest rates now believed to be in a gradually rising phase of the cycle.

It also looks unlikely that housing affordability will meaningfully improve its affordability position relative to consumer goods and services affordability in the near term, with the latter continuing on their gradually improving affordability trend over the longer term.

With regard to home-related affordability, the Municipal Rates, Tariffs, Maintenance and Repairs Affordability measure remained on its long term trend of deterioration in 2013 and early-2014, and looks set to continue to do so, given the weak state of finances of many municipalities and parastatals.

 Therefore, the overall affordability picture for 2014 looks set to be one of mild deterioration, and this informs our expectation that house price growth will slow mildly further through 2014, constrained by such a general affordability deterioration.

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