Roy Cokayne

The affordability of residential property could deteriorate mildly this year for the first time in six years, FNB has warned.

John Loos, the bank’s household and property sector analyst, said last week that this was based on FNB’s view of higher house price growth in a supply-constrained residential market this year, while interest rates remained unchanged and average employee remuneration growth was weak in an economy that was showing no significant employment growth.

He said its average house price-to-average employee remuneration index, and the instalment payment value on a new 100 percent bond on the average priced house-to-average employee remuneration ratio index both declined by 1.9 percent in the second quarter of last year compared with the previous quarter.

Loos said both indices were being driven to better levels of affordability by average employee remuneration outpacing average house price growth.

He said this brought the cumulative decline or improvement in the two affordability indices to 34 percent and 54.2 percent, respectively, since their 2007/8 peak levels.

However, he said mildly faster house price growth and struggling labour remuneration growth were expected to be negative for home affordability and to increasingly work against further home affordability improvements and possibly even result in some mild deterioration this year.

Loos stressed interest rates were not regarded as a negative factor because FNB did not expect any interest rate hikes yet.

He said FNB’s expectation of slightly more rapid house price growth despite pedestrian economic growth this year was based on its perceptions of increased confidence in residential property among both mortgage lenders and home buyers and mounting residential supply constraints.

He said building activity had remained slow for the past five years and FNB’s estate agents survey reported increasing supply constraints and gradually rising demand.

FNB has forecast house prices to increase by an average of about 9 percent year on year this year from 6.8 percent last year. Average house price inflation is expected to exceed wage inflation.

He said labour analyst Andrew Levy estimated average wage settlements for the first three quarters of last year at 7.9 percent, slightly higher than the 7.6 percent estimate for 2012.

But Loos suspected average wage settlements would be unable to continue accelerating under conditions of almost zero employment growth.

He added that Statistics SA’s measures of employment and wage bill growth showed employment growth at almost zero in the second and third quarters of last year in a weakened economy. This was expected to exert some downward pressure on wage increases in the near term.

Loos said Stats SA’s actual employee earnings numbers for the third quarter last year revealed a slight slowing in year-on-year average monthly employee earnings growth to 5.76 percent from 6.38 percent in the previous quarter.

He expected average monthly employee earnings growth to slow further in response to the further year-on-year slowdown in economic and employment growth last year.