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Bugle Sales Talk Editorial

Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2015-07-24
The relative affordability of goods and services tends to impact on the demand for those goods and services and housing is no exception. One could argue that absolute prices in themselves are meaningless as it is only relative affordability to other competing goods or pricing relative to income that is meaningful. For residential housing there are two widely used measures of affordability articulated in the FNB Residential Property Affordability Review. The first measures average house prices relative to average labour remuneration and the second the repayment value of a 100% mortgage bond on an average priced home relative to average labour remuneration.

Both measures improved marginally by -0,4% in the 4th quarter of 2014 as house price increases and interest costs on mortgages relative to average earnings declined. The bigger picture is how dramatically the affordability of housing has improved since the peak of "in-affordability" in 2007/8. Both these measures are substantially lower now - the cumulative decline (or improvement in affordability) has been -36.5% in the case of the average house price relative to income, and -53% in the case of the mortgage installment relative to income ratio.

Apart from only house prices and the costs of servicing a mortgage bond, affordability of housing also concerns the running costs of the home. Municipal Rates and Electricity costs are the two big items that can impact on buyer decision-making when evaluating affordability. FNB have measured the inflation of Municipal Rates and Maintenance and Repairs relative to remuneration using 2008 as the base year and found that this has been largely flat over this 7-year period. Similarly the cost of Water and other municipal services relative to average remuneration has also been relatively flat, and in fact is a little lower in real terms than in 2008. The real impact has been the dramatic increase in the cost of electricity over the past 7 years. This has escalated by a remarkable 50.19% over the period.

This impacts on tenants as well as homeowners as tenants typically pay for electricity over an above the rental on any given property. The current expectation is that Eskom will pass on additional double-digit increases in electricity costs, which will further impact on the affordability of housing. Informed property owners will therefore plan as far as possibly to introduce power saving aspects into their homes and money spent on heat pumps, solar panels and low voltage lighting in an attempt to reduce the consumption of electricity in a home, will prove to be a smart move. For Dolphin Coast residents the water shortage shock is an additional aspect to consider and how best to try and conserve or recycle water in a home has become a priority.

For every Rand spent on housing there are also other goods and services that can be seen as "competitors" for this money. As an example the choice to buy a car, furniture, household goods or even a holiday compete with Rands spent on housing. This "basket" of competing goods and services can be measured by simply taking the average of consumer prices as these already measure a basket of goods and services and compare them to average labour remuneration. When this is done it is interesting to see that this ratio has declined relative to 2000 for consumer goods while housing has increased or become less affordable relative to consumer goods over the past 15 years.

Rentals are a main alternate to ownership and the relative value of rentals is an important calculation to keep in mind when considering those aspects that impact on housing affordability. FNB provide a Price to Rent Ratio Index, which has been gradually rising over the past few years as house prices have exceeded to growth the rentals.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com