In the FNB Estate Agent Survey, FNB asked agents for their general perception of housing affordability, through requesting them to choose one of 3 statement options, i.e. “Income levels have kept up with house prices”, “Income levels have got a little behind house price levels” or “Income levels have got far behind house price levels”.
From the late-2014 Estate Agent Surveys onward, FNB started to see a perceived broad deterioration in residential affordability according to this line of questioning, after prior years of improvement. From 11%, as at the 3rd quarter of 2014, the percentage of agents perceiving “income levels to be far behind house prices” has risen to 32% by the 3rd quarter of 2016. Those perceiving “income levels to be a little behind house price levels” has declined over the same period, from 48% to 43%. This translates into a decline in those claiming that “income levels have kept up with prices”, from 41% in the 3rd quarter of 2014 to 25% by the 3rd quarter of this year.
From these 3 categories of responses, the FNB Estate Agent Affordability Perceptions Indicator is compiled. The Indicator is set up on a scale of 0 to 100. If 100% of respondents answer that “income levels have kept up with house prices”, the Affordability Perceptions Indicator will be zero. If 100% of them answer that “incomes are a little behind house prices”, the Indicator level will be 50. If 100% answer that “income levels are far behind house prices”, the Indicator level will be 100. Therefore, the higher the indicator, the worse are the perceptions of affordability.
The Affordability Perceptions Indicator level rose slightly (deteriorated) further in the 3rd quarter of 2016, from a previous quarter’s 50, to 53.5. The index is now noticeably elevated from 2014 levels that were generally in the 30s.
In short, agents do perceive housing affordability to have deteriorated noticeably since 2014.
These perceptions of estate agents are backed up with our own key FNB Housing Affordability Ratios, which have pointed to gradual deterioration in recent years
Of our 2 main affordability measures, the 1st measure, namely the “Average House Price/Per Capita Disposable Income ratio Index” has risen (deteriorated) by +4.8% from the 2nd quarter of 2013 to the 2nd quarter of 2016.
Add to that the past 2 years of interest rate hikes, and over the same period our 2nd FNB Home Affordability Index, namely the “Installment Value on a new 100% Bond on the Average Priced House/Per Capita Disposable Income Ratio Index”, has risen (deteriorated) by a more significant +20.6%
Our other key related affordability measures have also risen in recent years. Nobody needs to be reminded about the steady above-inflation multi-year rise in municipal rates and tariffs, most notably in the area of electricity tariffs.
Average house prices have not only been outpacing Per Capita Disposable Income growth, but also that of “competitor” consumer goods and services for many years, as well as outpacing that “rival” rental option, driving the Price-Rent Ratio higher. The rise in the latter ratio makes home buying less affordable (and ultimately less attractive) to the home rental option over time.
And of course there is the all-important Household Sector Debt-Service Ratio (the cost of servicing the Household Sector’s entire debt burden, expressed as a percentage of Household Sector Disposable Income, which) has been rising since a low reached in 2013, in the back of gradual interest rate hiking since January 2014.
Perhaps the only bright spot from a home owner point of view has been in the area of Home Maintenance Affordability, which has improved in recent years, it would appear.
In short, our Estate Agent Survey perceptions of a broad deterioration in home affordability (and most home-related affordability) since around 2014 have been largely realistic and justified.
Looking forward, however, there may be some early signs emerging of a possible shift from general housing and housing-related affordability deterioration, towards renewed affordability improvement.
House price inflation is far from strong, and slowing during the 1st 2 months of the 3rd quarter. Using the PCE (Private Consumption Expenditure) Deflator measure of Consumer Inflation, FNB have actually seen some mild decline in real house price levels in the past 2 quarters, while the Average House Price/Per Capita Disposable Income Ratio’s rate of increase has slowed to a snail’s pace.
In addition, Consumer Price Inflation appears largely under control at present, while the Rand behaves reasonably well, and it is expected to lead to the SARB keeping interest rates unchanged at current levels for a lengthy period. This in turn could all but halt the rise in the Home Installment/Per Capita Disposable Income Ratio Index’s rise, while also halting the rise in the Household Sector Debt-Service Ratio. Admittedly, the always-volatile Rand, and the looming risk of South Africa ratings downgrades, do pose risks to such expectations.
However, as yet FNB doesn’t believe that the end is in sight to municipalities and utilities’ drive to raise rates and tariffs at a significantly faster pace than either consumer price or household income growth. This part of affordability, therefore, could well deteriorate significantly further.
Read more here: FNB-Property-Barometer_Residential_Affordability_Review_16_Sep_2016
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