House prices in general are less affordable now than a few years ago as house prices have risen faster than remuneration, according to banking group Absa.
Absa senior economist Jacques du Toit says that as a result of various supporting factors present in the South African residential property market, nominal house prices increased at a brisk pace of 21,4% and 32,2% respectively in 2003 and 2004.
During this period the variable mortgage interest rate dropped by 600 basis points to 11% — its lowest level since 1980.
“A generally accepted method of determining the affordability of housing is to calculate the ratio between house prices and the level of remuneration. According to Absa’s calculations, this ratio has been on a rising trend, especially since mid-1999,” explains Du Toit.
“This implies, therefore, that during this period, house prices have risen faster than remuneration, with the result that housing has in general become less affordable,” he adds.
In 2004, although this ratio was at its highest level since early 1992, it was nowhere near the record high reached in the early 1980s, when house prices increased year-on-year by more than 40% in nominal terms at one stage.
“The downward trend in house price growth since late last year can probably be ascribed to the fact that housing has, in general, become less affordable, taking into account the sharp increase in prices towards the end of last year, salary and wage increases of well below 10% in 2004, as well as just 1% rate cut of 50 basis points only during the past twelve months,” Du Toit states.
Based on the average price of a house in the so-called “middle segment” (80m² to 400m² and priced at up to R2,2-million in respect of which Absa has approved loan applications) and prevailing interest rates at the time, the average monthly mortgage repayment and the qualifying gross monthly income were up by 27,4% in the fourth quarter of 2004 compared with the last quarter of 2003.
“Against this background, the affordability of housing, which is under pressure owing to sharply rising house prices compared with more moderate increases in remuneration levels, as well as stable interest rates, is an important factor that is expected to contribute to lower nominal growth of between 15% and 20% in house prices this year compared with 2004,” Du Toit says. — I-Net Bridge