Property Talk

Housing market vulnerability

The amazing thing about the residential property market is that it is driven and dependent to a large degree on the provision of mortgage finance. The banks that provide this much needed finance underpin the entire market and their contribution and importance to our industry cannot be overemphasized. With the provision of finance comes inherent risk and the banks have developed highly skilled economic research departments within their structures to analyse and categorize the various risks in order for them to make calculated decisions about how to lend the money they have access to.

The great thing for you and me is that many of these banks make their research available in the public domain meaning we have the full benefit of this intellectual capital if we know where to look for it and if we are willing to take the time. The recently published FNB Residential Market Stability Risk Review is a great example of this and outlines some these risks facing us.

They basically measure many areas of risk and then put these together in a composite household sector, residential property market and economic risk index. This is a very convenient way to communicate if the overall risk rating is improving or deteriorating. The good news is that the overall risk rating facing the South African housing market, according to FNB, is declining (i.e. improving). We are currently classified as being at the lower end of the High Risk rating band.

We will have a closer look at some of the key aspects within the housing market that determine its vulnerability. The first of these is the household debt-service risk. This measures the ability of households to service their debt in the future. This index has been declining over recent years as interest rates have remained flat and the appetite for new debt has decreased, and is now firmly in the medium risk zone. The second aspect is the household sector savings risk.

The more savings you have, the easier it is to withstand economic shocks. What is true for an individual is true for the market or economy as a whole. Currently we have a high savings risk rating meaning that our savings as a group are low. An interesting component of their risk index is the residential property speculative, panic and over-exuberance risk - currently having a medium level rating but at the low end of the medium band. When strong house price growth is mixed with cheap credit, buying frenzies result as we witnessed in 2006.

The supply of residential stock to the market is important in determining the balance of the market. Our current rating is low on this metric. This can largely be explained by one of my favourite stats - the Full Title Property Replacement Cost Gap measuring the difference between existing homes versus new builds. Believe it or not the measurement is currently 32.6% meaning new builds cost that much more that existing older homes. This therefore removes the incentive for developers to bring stock to the market.