Housing in Southern Africa July 2015

Housing

A ccording to FNB’s Household and Property Strategist: Mar- keting Analytics and Scenario Forecasting, John Loos this wave of buyer panic is significant considering house price growth is mediocre and only marginally above inflation. The June FNB House Price Index rose by 5% year-on-year. Loos suggests that South Africans obsession with home ownership has the potential to be a key driver of growth in the residential sector. During the 2004/5 period, where average house price inflation peaked at extreme levels over 30%, such panic was to be expected in a country where home ownership is such a high priority. But, first timehomeowners should also consider the current interest rate cycle and the cost of servicing a home The bottom line F NB’s Household Debt-Service Risk Index provides a simple indication of the vulnerability of the country’s household sector when it comes to being able to service its debt in future. Froma revised fourth quarter 2014 index level of 5,90 (on a scale of 1 to 10), the first quarter of 2015 saw a further rise to 5,99. This was the sec- ond consecutive quarter of increase, based on revised data, after a prior declining trend that took place from late-2012 to the third quarter of last year. This recent turn for ‘the worse’ is a concern, because the level of the Household Sector Debt-Service Risk Index remains above the key level of 5.7. Loos says this indicates that it is still rooted in the ‘High Risk Range’ and “is undesirable for it to be rising so soon, at a time when it is already high.

John Loos, FNB Household and Property Sector Strategist Market Analytics and Scenario Forecasting says that the hazards of low economic growth are reflected in a mild increase in Household Sector vulnerability to debt-service cost ‘shocks’.

index level does admittedly remain well-below the revised 7,59 peak reached in the first quarter of 2006, back in the household credit boom just before the start of the previous interest rate hiking cycle. However, to give perspective, we must also point out that the level is still far above the low of 2,28 reached late in 1998. The index is compiled from three variables, namely, the debt-to-dis- posable income ratio of the house- hold sector, the trend in the debt- to-disposable income ratio, and the level of interest rates relative to long term average (5-year average) consumer price inflation. “The country’s weak economic loan. “The reality is that for many of buying a home is the biggest single financial commitment that we can make. Not only does it bring about a debt repayment commitment but it comes at a cost - home insurance costs, security, maintenance, mu- nicipal and utilities bills as well as household furnishings. The FNB Estate Agent Survey high- lights that the number of residential sellers downscaling due to financial pressure, from 34% in 2009 to 12% in 2015, is still significant as interest rates have been at a multi-decade low in recent years. Loos suggests that buyers should buy ‘well within their means’ to be able to absorb interest rate hikes. The reality is that a significant number of homeowners have to sell and downscale later on. ■

growth rate over the past three years, which has exerted downward pressure on household disposable in- come growth and finally caught up in the first quarter of 2015. Despite very low household credit growth, amore significant drop in disposable income growth caused a quarterly rise in the Household Debt-to-Disposable Income Ratio, from a previous quar- ter’s revised 78% to 78,4% in the first quarter of 2015.” He explains that while this rise is small, it does serve to emphasise the constraining effect of slow economic and household income growth on the ‘de-leveraging’ process. With house- hold credit growth being pedestrian at best, one would expect in a 5-6% inflation country that we couldmake faster progress in lowering the still- high indebtedness ratio. But in a stagnant economy with slow income growth, such progress is difficult to achieve. It would currently appear to be an inappropriate time for any rise in Household Sector Indebtedness relative to income. Some key potential risks to infla- tion and interest rates exist due to South Africa’s vulnerability to Rand exchange rate shocks. South Africa’s current account deficit on the bal- ance of payments remains huge, and it depends on large levels of net foreign capital inflows to finance the deficit, putting the Rand constantly at high risk of weakness. Severe Rand weakness can mean surges in im- ported price inflation, in turn exerting upward pressure on local consumer price inflation and ultimately on interest rates. ■

And he says, points to an in- creased Household Sector vulner- ability to interest rate or disposable income ‘shocks’. The most recent Debt service risk

July 2015