Absa - house prices lag growth in income

According to Absa Home Loans senior property analyst, Jacques du Toit, the ability of many households to take advantage of the improvement in the affordability of housing was still encumbered by relatively high levels of debt, impaired credit records, the effect of the National Credit Act and the impact of all these factors on the lending criteria of banks.

“The continued low growth in mortgage finance extended to households is a reflection of the effect of these factors,” said Du Toit.

Du Toit added that  the improvement in housing affordability was based on the latest trends in the ratios of house prices and mortgage payments to household disposable income.

Speaking at a presentation on Absa’s latest quarterly housing review, released yesterday, Du Toit said the ratio of house prices to disposable income declined further in the first quarter and reached its lowest level since early 2004.

He said this was the net result of nominal house price growth of only 0.1 percent year on year and household disposable income increasing by a nominal 8.9 percent year on year in the quarter.

Du Toit said that the ratio of mortgage repayments to household disposable income dropped further to a record low in the first quarter.

This was the net result of the trends in nominal house price growth and household disposable income growth together with a slight fall in mortgage interest rates to their lowest since 1973.

The current low variable mortgage rate had resulted in monthly mortgage repayments being 33.5 percent lower compared with December 2008, when the mortgage rate was 15.5 percent.

However, consumers were still under pressure. The ratio of household debt to disposable income was now a bit lower than in the recent past but still high at 77 percent, compared with about 50 percent in 2002.

However, Du Toit did not believe this ratio would get back to 2002 levels again, adding that many consumers were still battling with their credit records, with almost 50 percent of credit active consumer having impaired credit records.
Du Toit stated that house prices rose faster than disposable income from 2000 until 2007 but there had been a reversal of that trend since late 2007 and he believed the relative affordability of housing would continue to improve over the next two to three years.

However Du Toit believed a key focus in the housing market in the future would be smaller units, adding that almost 74 percent of all new housing units built since 1994 were smaller-sized units and high density flats and townhouses.

He said this was a structural issue and he did not believe it would change a lot over time because affordability would become even more important moving forward.

Interest rates were expected to remain steady this year and “well into next year” with an interest rate hike expected in the middle of 2012, according to Du Toit. He added that the Reserve Bank’s monetary policy committee was expected to increase interest rates at every second meeting from then and a 200 basis point increase in interest rates was expected over this cycle from the middle of next year into 2013. Interest rates would remain at the same level after that for some time.

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