After six years of improving residential property affordability, 2014 could be a year in which this improving affordability trend is reversed mildly, and in which affordability becomes slightly more challenging.
After six years of improving residential property affordability, 2014 could be a year in which this improving affordability trend is reversed mildly, and in which affordability becomes slightly more challenging.
This is based on our view that 2014 will yield higher house price growth in a supply constrained residential market, interest rates will remain unchanged, and average employee remuneration will show weak growth in an economy not showing any significant employment growth.
The December SARB Quarterly Bulletin enabled us to update our own two housing affordability indices for the second quarter of 2013, using the SARB Average Employee Remuneration Index, the FNB House Price Index, and a Prime Rate time series.
As at the second quarter of last year, the improving trend in affordability was still continuing, but at a very slow pace, having slowed down noticeably from 2011 onward.
Of our two affordability measures, the first measure, namely the Average House Price/Average Employee Remuneration Index declined mildly by -1.9 percent in Q2 2013 compared to the level for the previous quarter.
The second measure, namely the "Instalment Payment Value on a new 100 percent Bond on the Average Priced House/Average Employee Remuneration Ratio” Index, also declined -1.9 percent in the second quarter, with both indices being driven to better levels of affordability by average employee remuneration outpacing average house price growth as per the FNB house price measure.
This brings the cumulative decline (improvement) in the two affordability indices to -34 percent and -54.2 percent respectively, since their 2007/8 peak levels, with wage inflation outpacing house price inflation for most of this period, and the second affordability measure having the added boost from big interest cuts since late-2008 (7 percentage points’ worth of cuts in total).
Looking forward, however, certain key factors look set to work increasingly against further home affordability improvements for the time being, and possibly even bring about some mild deterioration in 2014.
Interest rates aren’t yet one of these factors.
The two factors then expected to be negatives for home affordability are a year of mildly faster house price growth in 2014, and struggling labour remuneration growth.
Expected house price inflation of 9 percent could likely exceed average wage inflation, according to the SARB Quarterly Bulletin.
While economic growth looks set to be pedestrian yet again in 2014, our expectation of slightly more rapid house price growth, rising from an average of 6.8 percent last year to nearer to 9 percent perhaps in 2014, is based more on our perceptions of increased confidence in residential property, both from a mortgage lender and home buyer point of view it would seem, and mounting residential supply constraints.
Building activity has remained slow for the past five years, and our FNB Estate Agent survey reports significant agent stock constraints, while FNB’s valuers too are reporting increasingly constrained supply along with gradually rising residential demand.
Expected house price inflation of 9 percent could likely exceed average wage inflation, according to the SARB Quarterly Bulletin.
The Andrew Levy estimate for average wage settlements for the first three quarters of 2013 was 7.9 percent. This is slightly higher than the 7.6 percent estimate for 2012, but can it continue to accelerate under conditions of almost zero employment growth? We suspect not.
Statistics South Africa (Stats SA) measures of employment and wage bill growth show employment growth in second and third quarters of 2013 now at very near to zero in a weakened economy, which one would expect to exert some downward pressure on wage increases in the near term.
Indeed, according to Stats SA Q3 2013 data, actual employee earnings numbers (one quarter more current than the SARB remuneration index), there was a slight slowing in year-on-year average monthly employee earnings growth to 5.76 percent (this number includes discretionary remuneration), from the previous quarter’s 6.83 percent, and we would expect more of this slowing in response to economic and employment growth, which slowed further in 2013 compared to 2012.
What do our Estate Agent Survey respondents perceive? The survey asks agents for their perception of housing affordability, through requesting them to choose one of three 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”.
What we appeared to have at the end of 2013 was a slight deterioration in the average agent perception of residential affordability.
This conclusion needs to be qualified, as the percentage perceiving “income levels to be far behind house prices declined from 21 percent in the preceding quarter to 12 percent in the Q4 2013 survey.
However, those perceiving “income levels to be a little behind house price levels” rose significantly from 33 percent in the previous quarter to 48 percent, and the percentage of agents believing that income levels have kept up with prices” declined from 46 percent to 40 percent over the two quarters.
It is too early to ascertain whether the decline in those perceiving income levels to have kept up with prices in the fourth quarter survey is the start of a mild deteriorating affordability trend, but we expect that this may well come.- John Loos
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