‘Affordability drives house prices’

Published Apr 28, 2011

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The affordability and “back to basics” drive is still visible in house price trends in SA, while traditional measures of affordability continue to improve, financial services group First National Bank (FNB) said on Thursday.

FNB noted that during the first quarter of 2011, year-on-year house price growth declined further to 0.82%, according to its House Price Index, from the previous quarter's 3.1%. This was the third quarter of slowing in year-on-year growth following the mini acceleration of both the economy and the housing market out of the extreme slump of 2008-09, with the effect of the most pronounced part of the interest rate cutting phase from December 2008 to August 2009 having worn off.

“The insignificant pace of house price inflation, coupled with the likelihood of far stronger wage remuneration inflation, and a slightly lower average interest rate in the first quarter compared with the previous two quarters (with the prime rate currently at 9%), makes it very likely that the affordability of housing continued on its improving trend in the early stages of 2011,” the group said.

FNB said that its Estate Agent Survey for the first quarter of 2011 pointed to agents' perceptions of housing affordability, in terms of price levels relative to buyer income levels, having improved significantly.

“We believe that this perception is to a large extent justified. As at the first quarter of 2011, it is very likely that housing affordability, as measured by the average house price/average remuneration ratio and by the installment repayment/average remuneration ratio, continued to improve. This is due to anaemic house price growth of 0.82% year on year for the first quarter, according to the FNB House Price Index, the likelihood of wage inflation being significantly stronger than house price growth, and a further decline in the average interest rate following a late-2010 interest rate cut,” said FNB property strategist John Loos.

However, he pointed out that affordability calculations were based on the wage growth of those employed, and after a major decline in formal sector jobs during the recession in 2008-09, recent employment growth remained very slow. “Therefore, the household sector as a whole remains financially constrained, and despite the improvement in traditional measures of housing affordability, housing demand growth has not yet set the world alight,” Loos said.

FNB said that it was not surprising that, when house prices around major metros were measured on a value band basis, the affordable area segment had shown the best price growth in recent times. On a year-on-year basis, affordable area (with an average price of 377,864 rand) average price growth measured +8.9% for the first quarter of 2011.

Within the affordable segment, the former black township component stood out as being the strongest, which also potentially reflected a lack of supply of stock relative to former suburban areas. The other three area value bands were grouped in a very narrow range of price growth, with top-end areas (with an average price of 1.882 million rand) showing 5.2% growth, middle-income areas (with an average price of 712,764 rand) showed a 4.6% increase, and high-income areas (with an average price of 1.086 million rand) increased by 3.8%, the group said.

“The household sector's financial constraints continue to keep it focused on basics, and this can be seen in coastal holiday town price estimates continuing to show significant deflation to the tune of 6.9% year on year,” Loos said.

“However, despite some difference in the relative performances of segments, virtually all housing segments that we measure have shown further deceleration in price growth during the first quarter,” the strategist added.

He highlighted the exception as being the sectional-title-less-than-two-bedroom segment. “Whereas, the sectional-title-three-bedroom sub-segment recorded a meagre 0.3% year-on-year price growth in the first quarter, and the two-bedroom sub-segment 0.4%, the sectional-title-less-than-two-bedroom sub-segment showed a significantly better 6.6% growth, and was the only major segment in both the full title and sectional title markets to see its growth accelerate, from the previous quarter's +4.8%,” FNB said.

It noted that the less-than-two-bedroom sub-segment was believed to be a major target of first-time buyers in the former white suburban areas. “Its reliance on first-time buyers may be starting to benefit it at present, because our FNB Estate Agent Survey shows an increase in first-time buyers as a percentage of total buyers from 17% in the fourth quarter of 2010 to 22% in the first quarter of 2011,” Loos said. - I-Net Bridge

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