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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