Affordability stalls as disposable income growth battles to outpace house price increases

by JOHN LOOS

The two quarterly FNB Housing Affordability Ratios pointed to slight residential affordability deterioration in the first quarter of 2018, despite very slow house price growth.

This reflects a weak economy translating into weak per capita household disposable income growth battling to outpace even modest house price growth.

For both credit-dependent as well as cash home buyers, home affordability deteriorated very slightly in the first quarter of 2018, stalling a recent improving national affordability trend which has been intact through 2016 and 2017, according to the two FNB Home Affordability Indices.

The first measure – the average house price/per capita disposable income ratio index – rose (deteriorated) by +0.2% in the first quarter of 2018, following on a -1.2% decline (improvement) in the previous quarter. This stalls the broad declining (improving) trend that started in the third quarter of 2015. Nevertheless, this affordability index remains down (improved) by -4.03% since its seven-year high reached in the second quarter of 2015.

The second affordability measure – the instalment value on a new 100% bond on the average priced house/per capita disposable income ratio index – also rose (deteriorated) slightly by +0.2% in the first quarter of 2018, after a -1.2% decline in the prior quarter. This first quarter 2018 affordability measure did not yet benefit from a 25 basis point interest rate cut in March, as the cut came only right at the end of the quarter in focus.

This index had previously been on a broad improving (declining) trend since a seven-year high reached in the second quarter of 2016 (the quarter in which the last interest rare hiking cycle ended), and is still down (improved) -4.53% cumulatively since then despite the slight first quarter deterioration.

The failure to achieve further home affordability improvements in the first quarter of 2018 came largely as a result of a quarterly economic contraction in the first quarter, which resulted in weak nominal quarter on quarter per capita disposable income growth.

Whereas quarter on quarter house price growth was a meagre +0.4% in the first quarter, nominal per capita disposable income growth was an even weaker +0.2%.

On a year on year basis, per capita disposable income growth remained above house price growth in the first quarter, the former measuring 5.1% and the latter 3.0%. So it is likely that in the near term the home affordability improvements (declines in the indices) may resume, and that the first quarter deterioration was a once-off.

However, the fact that year on year growth in nominal per capita disposable income has slowed from a multi-year high of 7.1% in the second quarter of 2016 to 5.1% by the first quarter of 2018 has made it tougher to achieve home affordability improvements of late, and it will require very slow house price growth to achieve further noticeable affordability improvements in future.

So how affordable or unaffordable is the housing market? The two affordability measures are still significantly improved (down) on their late pre-2008 boom time highs around 2006 to 2008. The average house price/per capita disposable income index is -25.3% down on its revised boom time high reached in the third quarter 2007, while the new bond instalment/per capita income ratio is -40.4% lower than its first quarter 2008 high point.

On the other hand, though, the house price/per capita income ratio index is still +41.74% above the first quarter 2001 pre-boom level, so it is still far from cheap by historic standards. But keeping property values still temporarily comparative, affordability-wise, to early-2001 has been a period of abnormally low interest rates in recent years, which has meant that the loan instalment/per capita disposable income index is actually  only +8.7% above (less affordable than) the first quarter 2001 level.

South Africa’s currently low interest rates thus continue to assist in sustaining the relatively high real house price levels (by SA’s historic standards) that we currently experience.

John Loos is the household and property sector strategist at FNB Home Loans.