Property Talk

Author: Andreas Wassenaar
Date: 2016-04-01

Home affordability is in the spot light and it is useful to understand the underlying factors that impact on the measures of home affordability and what we can expect to happen over the next few years. FNB's recently published Residential Property Affordability Review provides useful insight into the measures of housing affordability. The two main measures of home affordability are the average house price to disposable income ratio index and the installment value of a 100% bond to disposable income ratio index. The first measure focuses on the average price of homes relative to average disposable income of households and the second looks at the cost of financing the average home relative to the same disposable income. Since 2013 these ratios have changed trend and have been increasing marginally. The average house price measure rose by 1% in the 4th quarter of 2015 and the installment value measure rose by 2.1% over the same period. Since the 4th quarter of 2012, the average house price measurement of affordability has increased (i.e. deteriorated) by 5,9% and given the interest rate increases experienced over the past two years the installment measurement of affordability as increased by a more significant 15,9%. This basically tells us that over the past three years for those people who have been relying on high levels of finance to purchase a property (your typical first time home buyers), homes are now almost 16% less affordable than they were in 2012. Although the prediction is for slowing average house prices over the next two years, we have seen the measures of disposable income also declining relative to house prices, indicating that the trend in affordability deterioration may well continue.

Estimates of home running costs with respect to the main cost categories confronting home owners, such as Municipal Rates, Water and Electricity, and Repairs & Maintenance, are insightful to study in order to provide a clear overall picture of the impact on home ownership affordability. The Municipal Rates measure relative to disposable income has deteriorated (increased) by 34.97% since 2008. The Water component has increased by a more moderate 15,91%. The major upward pressure has come from the Electricity to disposable income measure, which has increased by 91.01% since 2008. With Eskom calling for additional above inflation tariff hikes we can expect this component remaining significant in our affordability measurements. By contrast, the measurement for Home Maintenance and Repairs relative to disposable income has actually declined (improved) by 4,9% since 2008.

When we consider competitor product affordability to housing, such as consumer goods and services, we begin to understand the relative price and affordability advantage consumer goods have enjoyed since 2001. By the 4th quarter of 2015 the average consumer price to disposable income ratio had dropped to 77.96 (from 100 as at the 1st quarter of 2001). By comparison the average priced home to disposable income ratio over the same period is 127.84. This means that relative to a wide range of consumer goods, housing is significantly less affordable.

Credit affordability is an important determining factor of home ownership and is a function of the value of credit outstanding, the level of disposable income and the prevailing interest rate. The Debt Service Ratio - the cost of servicing total household debt expressed as a percentage of disposable income is a great measure of credit affordability. This measurement indicates the same trend reversal since 2013 with an increase of 9,7% over the past two years.

Pressure on the affordability of home ownership is particularly good news for landlords, as more people will elect to rent rather than buy, when faced with affordability constraints.

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

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