Whatshot
Property Talk
Property Talk
Date: 2018-04-06
Within a residential property market the commercial banks are typically key role players in their provision of mortgage finance. This finance is the lubricant in the engine that keeps the system active and working. It would be hard to imagine a property market without mortgage finance.
The banks have become experts in managing the risks associated by being exposed to the residential mortgage market. FNB's recently published report on the South African residential property market risk is an excellent example of the categorization of the various risks that are considered and what the current assessment is of each of these key risks.
These are then neatly combined into an overall Household Sector and Housing Market Risk index. There are six important sub-indices to the Housing Market Risk index. These are the 1. Household Debt-Service Risk, 2. Household Sector Savings Risk, 3. Disposable Income Windfall Risk, 4. Residential Property Speculative, Over-Exuberance and Panic Risk, 5. Housing Affordability Risk, and the 6. New Building Oversupply Risk.
The Debt-Service Risk attempts to look at the vulnerability of households and their ability to service future debt. This would no doubt be a key concern for any mortgage provider. Three variables impact this risk.
This makes households less vulnerable to future economic shocks and increasing interest rates. Our household sector savings risk remains critically high as we simply do not save enough. It is however somewhat improved over the past three years.
The disposable income windfall risk is very low at the moment. This is the risk of stronger economic growth leading to poor decisions regarding taking on more debt and therefore over-committing. The speculative, panic and over-exuberance risk is currently low.
With interest rates being far higher than the average growth rate in property prices there is little incentive in the market to borrow money in order to buy property simply to re-sell at an expected higher price. The "panic" aspect refers to first time buyer panic buying in an attempt to lock prices in which are expected to rise dramatically in the near future. This is not descriptive of our current market.
Our home affordability risk is however high, but significantly improved on the peak reached towards the end of the boom cycle in 2007. South African home prices remain high relative to per capita disposable income, average rentals and the consumer price index. The new building over-supply risk is currently classified as low.
The new builds are currently on average 29.4% higher than the existing homes and this gap has widened in recent quarters meaning that the cost of building is inflating at a higher rate than the price of the existing stock of homes.
Putting all of the above risk indices together in a single composite household sector housing market risk index, FNB produce an excellent overall representation of the risk within the housing market. The current result is a medium risk rating.

