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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2017-03-31

Prices are only meaningful when considered relative to earnings or other comparative prices. It is from this understanding that your two key measures of home affordability have been derived.

Far from experiencing an ever-increasing house price index we have seen major adjustments and fluctuations over the past 15 years. The two measures of housing affordability are well presented in FNB's latest property affordability review.

The first measure is the average house price relative to the per capita disposable income ratio index. This house price to income left in your pocket benchmark declined (improved) by -2,1% in the 4th quarter of 2016 and has declined for four consecutive quarters.

The second measure looks at the installment value on a new 100% bond on the average priced house relative to per capita disposable income ratio index. This measure responds accurately when we have increases in interest rates that impact directly on our ability to buy property but may not impact quickly on house prices.

It would therefore be the preferred measure of affordability in a highly credit driven market. Both the measures of home affordability have been driven lower in the 4th quarter of 2016 by a slow average house price inflation rate of only 1,8% down from the 7,2% year-on-year recorded 4 quarters earlier at the end of 2015.

While house prices have declined, nominal disposable income has increased at a rate 5,8% year-on-year as at the 4th quarter of 2016. So income up and house prices down makes it more affordable.

To answer the question as to how affordable or in-affordable the housing market is, we can benchmark the current figures against the boom period. The average house price to per capita disposable income index is down -26.6% since the peak recorded in the 4th quarter of 2007 while the mortgage bond installment to per capita income ratio is -41.8% lower than its 1st quarter 2008 high point. That is a big improvement in affordability over the past ten years.

The simple fact is that the residential market has slowed considerably since early 2016. The already slow house price growth of 1,8% recorded in the 4th quarter of 2016 slowed even further to 0.7% in the 1st quarter of 2017. Because interest rates have remained unchanged since March 2016, already a year ago, their impact on affordability has been neutral. The outlook is therefore for a further improvement in affordability into the 2nd quarter of 2017.

Home ownership affordability is also impacted on the running cost related items such as Municipal Rates, Water and Other Municipal Services, Electricity and Home Maintenance and Repairs inflation. What is interesting is that the worst by far since 2008 has been the 92,54% increase in cost of electricity to home owners. Municipal Rates have escalated by 36.68% over the same period and Water and other Municipal Services by a mere 17.44%. The relief for property owners has come from the CPI of Home Maintenance and Repairs relative to per capita disposable income measuring the affordability of home maintenance and repairs and this has improved (or declined) by -12.4% since 2008.

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