Thursday 28 March 2013

How Affordable is our Housing? (The Bugle)


The Reserve Bank’s Monetary Policy Committee, which meets every two months to review interest rates and make adjustments deemed appropriate to primarily control inflation, while balancing the need for employment and growth, decided at their most recent meeting on 20th March 2013 to leave interest rates unchanged. This is good news for the property market and for most other credit sensitive industries, as the expectation for increases in interest rates had become more pronounced as our consumer price inflation rate was being edged upwards. This was recorded at 5,9% in February 2013 which is now testing the Reserve Bank’s upper target limit of 6%. The general consensus now is that interest rates will continue to move sideways for the rest of this year. 

How does this impact on the affordability of housing and has housing become more or less affordable over the past five years? The two traditional measures of housing affordability are the “Average House Price/Average Labour Remuneration”  ratio and the “Installment Value on the Average Priced House/Average Labour Remuneration” ratio. The installment value decreases as interest rates decrease. This measure of affordability is therefore directly affected by interest rate movements. As house prices fall and general remuneration increases, buying a house becomes more affordable. This is exactly what has happened. We have witnessed a huge decline (or improvement) in affordability as measured by the installment index from a peak of 160.90 in 2007 to 76.86 by the 3rd quarter of 2012. This represents a 52.2% decline or improvement in the affordability of housing in general in the country over this period. 

It is therefore not surprising that we have recorded a noticeable increase in demand for residential property over the first quarter period of 2013. There is a seasonal component involved in this uptick in demand, with the month of February typically being a record sales month for most larger estate agencies across the country. Interest rates however have been low for a while. Prime decreased to 9% on 18th November 2010 and then again to 8.5% on 19th July 2012. Why the sudden increase in demand so many months later? An explanation is given by FNB in their recently published  Property Barometer report where the human trait of “Recency Bias” is explained: People place a greater emphasis on recent events when evaluating risk, as opposed to events further in the past. The 2008/9 recession and high interest rates are thus likely being gradually forgotten, and more households’ confidence levels are increasing as a result, causing a greater interest in residential property. I would suggest that the only thing currently holding back the floodgates of demand is the availability of mortgage finance. Although banks have been very busy with unsecured lending, overall mortgage lending has grown by less than 2%. This is the key measure that has to improve before we will witness a noticeable recovery in residential property demand.

(Author: Andreas Wassenaar, published in The Bugle, 27th March 2013)

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