Absa - Mortgage finance

Commercial banks’ variable mortgage interest rates were stable at 12,5% in the first few months of 2007 after lending rates had been hiked by a total of 200 basis points between June and December last year.

Based on an average house price of R892 492 in the middle segment of the market in the first quarter of 2007, Absa reports the monthly repayment on a new mortgage (100% over a 20-year repayment period at a variable mortgage rate averaging 12,5%) amounted to R10 140. In the same quarter of 2006, the comparable repayment was R7 714, calculated at an average house price of R772 614 and a mortgage rate of 10,5% at the time.

The difference of R2 426 between these monthly repayments can be ascribed to house prices being 15,5% higher in the past quarter than they were a year ago, whereas the mortgage rate was 200 basis points higher than in the first quarter of 2006.

Affordability of housing

In view of house price and interest rate developments, the gross monthly household income required to qualify for a 100% mortgage on a R892 492 house for which the monthly repayment does not exceed 30% of income was R33 800 in the first quarter of 2007.

This was 31,5% higher than a year ago, when a monthly household income of R25 712 was required to qualify for a 100% mortgage on a R772 614 house.

House price growth has been on a declining trend over the past twelve months. The steady increase in interest rates since mid-2006 has been a major contributor to the increase in the year-on-year growth in the required income from 12,7% in the first quarter of last year to 31,5% in the first quarter of this year.

The house price-to-remuneration ratio tapered off somewhat in the third quarter of last year (most recent
remuneration data available), mainly as a result of strong nominal growth of 8,1% y/y in the remuneration per worker in the non-agricultural sectors of the economy, with year-on-year house price growth declining further at the time.

The ratio of mortgage repayments to remuneration increased further in the third quarter of last year to its highest level since the first quarter of 1992. The higher interest rates since June last year largely contributed to this development. An increase in the abovementioned two affordability ratios implies that house prices and mortgage repayments are rising at a faster rate than remuneration, which means that housing is, in effect, becoming less affordable.
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