Residential property-related affordability is important to both lending institutions as well as their mortgage lending clients, as shifts in affordability have implications in terms of the level of financial pressure that they can exert on households.
Therefore, whereas a dramatic improvement in home and home-related affordability from late-2008 to 2012 was instrumental in lowering levels of bad debt and distressed home selling, early signs of mild affordability deterioration in 2014 begin to pose financial "limitations" on the household sector.
The December SARB Quarterly Bulletin enabled us to update our own two housing affordability indices for the second quarter of 2014, using the SARB Average Employee Remuneration Index, the FNB House Price Index, and a Prime Rate time series. As at the second quarter of 2014, we saw a further slight deterioration in these measures of affordability.
Of our two main affordability measures, the first measure, namely the Average House Price/Average Employee Remuneration Index, rose (deteriorated) slightly by +0.6% in the second quarter of 2014 compared to the level for the previous quarter. This translates into a +2.8% rise on the final quarter of 2013.
The second measure, namely the "Installment Payment Value on a new 100% Bond on the Average Priced House/Average Employee Remuneration Ratio" Index, also rose by +0.6% in the second quarter, which translates into a more noticeable +6.6% rise since the end of 2013. Both indices were driven higher by house price growth exceeding growth in average employee remuneration, while the latter index had the additional upward pressure from the first 50 basis point interest rate hike, which took place in January 2014.
Nevertheless, the affordability levels remain far improved on the highs of "in-affordability" experienced back around 2007/8. The cumulative decline (improvement) in the two affordability indices since their 2007 peak levels are -31.7% in the case of the Average Price/Income Ratio Index and -50.4% in the Instalment/Income Ratio Index.
While we do not yet have the updated Reserve Bank Average Employee Remuneration Index for the third quarter, the evidence available suggests that not too much happened on the Residential Affordability front in the latter half of 2014.
The StatsSA Average Non-Farm Employee Earnings data pointed to something of a normalisation in Average Employee Earnings growth to 6.6% year-on-year in the third quarter, after a dip to 4.8% in the 2nd Quarter. This is virtually in line with 6.4% year-on-year house price inflation in the 3rd quarter.
However, a mild deterioration in the Bond Repayment/Average Remuneration Ratio may have taken place due to a further 25 basis point interest rate increase in July.
Looking forward into 2015, we believe that certain key factors could cause further mild home and home-related affordability deterioration.
Over the past three years, we have seen a broad improvement in residential demand relative to supply, reflected in both FNB's Valuers' Market Strength Index which continues to rise, as well as in a broad declining trend in the average time of properties on the market prior to sale, as per the FNB Estate Agent Survey.
While this improving market balance, and mounting residential supply shortages, are expected to bring about a resurgence in residential building completions in 2015, we don't expect that this will be in time to prevent slightly higher house price inflation this year. As such, we expect a further acceleration in average house price growth into the 8-9% range, and do not believe that Average Employee Remuneration will follow suit.
The net result is expected to be some further moderate increase (deterioration) in both of the above mentioned affordability ratios.
In addition, our interest rate forecast is for a further 75 basis points' worth of interest rate hiking during 2015, with the Reserve Bank continually signaling its intention of "normalizing" interest rates from abnormally low levels. However, the slump in oil prices and global food prices increases the possibility of rate hikes being shifted outwards, so we would place a bigger probability of stronger house price inflation causing affordability deteriorations in 2015 as opposed to interest rate hiking.
Considering other affordability measures strongly related to housing, 2014 saw a broad deterioration in this group too. Unsurprisingly the "Municipal Rates, Tariffs, Maintenance and Repairs/Average Employee Remuneration" Index has been on a gradual broad rising trend through the entire 2008-14 period. This affordability measure rose (deteriorated) slightly during the second quarter of 2014, by +0.4% on the previous quarter, and it is now +4.22% above its level at the beginning of 2008, having been driven higher mostly by high inflation in the area of electricity tariffs.
In addition, real house price levels (house prices adjusted for consumer price inflation) rose slightly in 2014 as a whole, indicating that housing lost some "price competitiveness" to the competing consumer goods and services last year.
Finally, there is the matter of credit affordability, which is a function of how much credit is outstanding, the level of disposable income, and of course the prevailing level of interest rates. The best measure of the affordability of Household Sector credit is the Household Debt-Service Ratio (The cost of servicing the household sector debt burden, expressed as a percentage of Household Sector Disposable Income). The SARB's "interest only" version of this ratio, like the two housing affordability indices, after ending its downward trend in 2013, began to rise late in 2013, from a revised 8.5% in the third quarter of that year to 9.1% by the third quarter of 2014, lifted in part by the SARB's January and July interest rate hikes.
Therefore, the most recent data points to 2014 as being a year where we started to see indications of mild deterioration in various Residential and Residential-related affordability measures. This comes after dramatic affordability improvement through 2008-2011, as interest rates came down and house price growth was anaemic. Then, times began to change around 2012 as the residential market started to strengthen more noticeably, house price inflation became more rapid, and interest rate cuts ended and then more recently actually rose slightly.
As yet, the deterioration has been small, and residential-related affordability remains vastly improved from 2007/8.
Looking into 2015, we expect a further slow affordability deterioration, based on our projection of slightly higher house price growth in the region of 8-9%, and the expectation that average employee remuneration growth will not quite keep pace.
