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House price growth slowdown not likely to improve consumer affordability

Rondebosch houseThe FNB Property Barometer’s residential property affordability review found that home affordability deteriorated further for credit-dependent consumers.  This continuation of the decline that started in 2013 is driven by the interest rate hikes that took place earlier in 2016.

Two measures are used to determine property affordability: a ratio of the per capita disposable income of the consumer compared to house price inflation. Quarter-on-quarter house price inflation slowed from 1.9% in 2015 Q4 to 1% in 2016 Q1, whereas per capita disposable growth remained unchanged at 1.3% across these two quarters. The consumer does have more disposable income, while property prices are increasing at a slower rate.

The second measure is the loan instalment/per capita disposable income ratio, which has had upward pressure from interest rate hikes that took place during the first quarter of 2016. This ratio estimates the consumer’s ability to furnish the instalment value on a 100% bond on the average priced house, and based on the 75 basis point interest rate hike in 2016 Q1 it is obvious why homes are less affordable based on this instance.

According to John Loos, household and property sector strategist at FNB, house price inflation may soon be lower than per capita disposable income growth or even consumer inflation, thus no increase in real house prices for some time. “However, for credit dependent home buyers we don’t believe that home buying affordability is quite over yet,” said Loos. “We are anticipating a further 50 basis point increases in interest rates by early 2017.”

Affordability of home running costs are also not likely to increase based primarily on the on-going drive by municipalities and utilities to increase tariffs faster than consumer price or household income inflations.

Therefore, although the slowdown in house price inflation is likely to continue, the affordability of consumers, especially those who are credit dependent, is unlikely to improve.

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