Absa - Affordability of housing

News > news - 31 Oct 2005
A generally accepted method to determine how the affordability of housing has changed over time is to calculate the ratio of house prices to household income. During the past five years (2000 to 2004), the nominal year-on-year growth in house prices outstripped that of gross household income by a large margin.

This, Absa notes in its Residential Property Perspective Fourth Quarter 2005, resulted in the ratio of house prices to household income increasing from a relatively stable 4,0 times on average during 1996 to 1999 to 4,5 times in 2000, and as high as 7,2 times in 2004. With house prices having risen faster than household income since 2000, housing has, in general, become increasingly less affordable during the past few years up to 2004.

The ratio of house prices to household income has increased without exception in each province, metropolitan area and rural region in the country between 1996 and 2004. In some regions (especially the rural areas) this ratio increased sharply to relatively high levels over the past nine years. This was mainly the result of generally low annual growth in household income in these regions over this period, whereas the level of household income in the metropolitan areas was, on average, also much higher than in the rural areas.

Despite the fact that the Western Cape and Gauteng have some of the highest house prices in the country, their ratios of house prices to household income have remained relatively low up to 2004 (6,1 and 4,7 respectively) compared with some other provinces, such as the Eastern Cape with a ratio of 10,6, Limpopo at 8,3, North West at 7,7, KwaZulu-Natal at 7,6 and the Free State at 7,5. The ratios of these five provinces were above the country average of 7,2 in 2004.

In various provinces, the ratio of house prices to household income has increased at a much faster rate than in Gauteng and the Western Cape since 2000. The main reason for this is that the levels of household income in the Western Cape and Gauteng are, on average, significantly higher than in most other provinces, whereas Gauteng has also recorded the highest growth in household income of around 9,5% per annum during the past five years.

During 2000 to 2004, the affordability of housing has decreased rapidly in provinces such as the Eastern Cape, North West, the Free State, KwaZulu-Natal and Limpopo. The result
is that, in terms of house prices in relation to household income, residential property can be regarded as expensive in these provinces compared with the rest of the country.

Whereas residential property prices have increased quite significantly in most of the abovementioned few provinces in the past five years, the significant changes in respect of
the affordability of housing in these regions can also be ascribed to gross household income increasing by only 5,5% per annum in nominal terms in the Free State, Limpopo and the Eastern Cape during this period.

Growth in household income was around 6,5% per annum in North West in 2000 to 2004, whereas it came to about 7,5% per annum in KwaZulu-Natal during the same period.

In the metropolitan areas of greater Johannesburg and Pretoria, housing was more affordable than in any of the other urban areas around the country. This can again be ascribed to household income levels being the highest in these two metropolitan areas, despite them having some of the highest house prices in the country.
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