Both the First National Bank (FNB) two main affordability measures showed a mild decline in the fourth quarter, implying some home affordability improvement.
The first measure, namely the “Average House Price/Per Capita Disposable Income ratio Index”, improved -2.1% in the fourth quarter of 2016 compared to the level for the previous quarter, the fourth consecutive quarter of decline.
The second measure, namely the “Installment Value on a new 100% Bond on the Average Priced House/Per Capita Disposable Income Ratio Index”, also declined (improved) by -2.1% in the fourth quarter, its second consecutive quarter of decline following an earlier prior rising trend.
Both of the two affordability indices were driven lower in the fourth quarter by a slow average house price inflation rate of only 1.8%, having slowed from 7.2% year-on-year only 4 quarters earlier as at the final quarter of 2015. By comparison, Nominal Per Capita Disposable Income was growing at a significantly faster 5.8% year-on-year as at the final quarter of 2016.
Simultaneously, there has been no further interest rate movement since the 1st quarter of 2016, meaning that interest rates played no role in the decline of the Loan Instalment/Per Capita Disposable Income Ratio.
Examining the longer term trends, the recent improvements in home affordability almost negate the cumulative deterioration, of the few years prior to 2016, in the Average House Price/Per Capita Disposable Income Ratio Index at least. The cumulative result of the relatively strong housing market period from 2013 to 2015 (in which time home affordability deteriorated mildly), and then the weakening market through 2016 (with resultant affordability improvement), was that the Average House Price/Per Capita Disposable Income Ratio Index is a mere +0.2% higher as at the 4th quarter of 2016 when compared with the 1st quarter of 2013.
However, over the same period, the 2nd measure of housing affordability, i.e. the Loan Instalment/Per Capita Disposable Income Ratio Index, was +15.3% higher due to two percentage points’ worth of interest rate hiking between January 2014 and March 2016.
How affordable is the housing market?….still relatively high by pre-boom levels, but significant down on 2006-8 boom time highs.
So how “affordable” or “in-affordable” is the housing market? The two affordability measures are still vastly improved (down) on their late-boom highs around 2006-2008. The Average House Price/Per Capita Disposable Income Index is -26.6% down on its revised boom time high reached in the 4th quarter 2007, while the New Bond Installment/Per Capita Income Ratio is -41.8% lower than its 1st Quarter 2008 high point.
On the other hand, however, the Price/Per Capita Income Ratio Index is still +19.18% above the 1st quarter 2001 “pre-boom” level. But keeping property still “temporarily” comparative affordability-wise to early-2001 has been a period of abnormally low interest rates in recent years, which has meant that the Loan Instalment/Per Capita Disposable Income Index is actually still -7.04% below (more affordable than) the 1st quarter 2001 level.
The drivers of the two key affordability ratios
It has been a weakened residential market that led to the onset of residential affordability improvements, as measured by the 2 FNB Affordability Indices, through 2016.
The Residential Market has slowed considerably since early-2016, translating into slowing average house price inflation.
By the final quarter of 2016, average house price inflation had slowed to a mere 1.8% year-on-year, and this has slowed further to 0.7% in the 1st quarter of 2017.
While we don’t yet have 1st quarter 2017 per capita disposable income growth data, it is unlikely that this growth would be as slow in nominal terms as the most recent house price growth estimates.
In addition, interest rates continue to play a neutral role in affordability, given no further moves in rates since March 2016.
“This leads to the expectation that we will see a continuation of the housing affordability improvements in the 1st quarter 2017 data, and probably even beyond that further into 2017,”: according to John Loos FNB property analyst.
“In addition, we expect to see further improvement (decline) in certain other key affordability measures. These include the Real House Price measure (house prices relative to consumer goods and services price levels), the Price-Rent Ratio, and the Household Debt-Service Ratio (the cost of servicing household debt relative to disposable income),” says Loos.