Mid-income SA scores on housing

Housing in Hong Kong is among the most expensive in the world and prospective first-time homeowners have given up on any aspirations of acquiring a decent-sized home.

One new development in the city is setting a record for micro-apartments, which will be slightly less than 12m2 in size. Excluding the balcony, kitchen and bathroom, the living space will be a scanty 4.6m2 — about half the size of a standard ­parking space.

In Australia, furniture retailer Ikea’s 2017 catalogue, replete with sleeper couches, balcony gardens and nifty storage units, offers a glimpse into the reality of living in matchbox flats that many young professionals can only dream of owning, particularly in the ­exorbitantly priced Sydney ­housing market.

In the third least affordable city in the world, Vancouver, where no free standing house sells for less than C$1-million (R10-million), the high cost of housing is resulting in homelessness, according to a recent report.

In many places where interest rates are low, investors have piled into speculative investments such as property in search of higher returns. Homeowners have also been able to buy more expensive properties as a result of lower interest rates. Higher demand has sent prices soaring.

South Africa’s real estate market appears to be rosier than in many developed and emerging ­markets, although experts warn that a variety of factors should be ­considered when determining property affordability.

According to Numbeo.com, South Africa’s house price-to-income ratio (median house prices to median disposable household income) is the third-best in the world, ranking behind the United States and Saudi Arabia. Venezuela, Syria and Hong Kong fare the worst.

The other Brics nations — India, Russia, Brazil and China — rank 40th, 68th, 82nd and 93rd on the list respectively.

Numbeo is the world’s largest database of user contributed data about cities and countries worldwide, and provides current information on world living conditions, including property affordability. A widely used price-to-income ­measure shows how affordable a ­property market is.

Another measure used by Numbeo is the ratio of the mortgage as a percentage of income — the monthly cost of a bond compared with a household’s disposable income. Again South Africa rates well, coming in sixth, after Saudi Arabia, the US, Libya, Cyprus and Puerto Rico.

The gross rental yield a year — the rent a year, before tax, divided by the house price — is of particular interest to global property investors, and South Africa is rated sixth best for its cities, and fourth best for properties outside of city centres.

Although Numbeo’s data is based on what its users provide, the website’s affordability findings correlate with those of other major studies, such as the Demographia International Housing Affordability Survey, which rates middle-income housing affordability.

By comparing medium house prices to pre-tax household income — the recommended measure by the World Bank and the United Nations — the survey found the most affordable housing market is in the US and the most unaffordable is in Hong Kong. But the survey does not include most emerging markets.

But, said John Loos, the household and property sector strategist at FNB, there are many different dynamics at play in the different markets and affordability cannot be compared meaningfully.

In the United Kingdom, for example, nearly everyone is in formal housing, unlike in South Africa, Loos said. “For those earning nice salaries, owning a house in South Africa might be more affordable than in the UK.”

No entity puts out an official price-to-income ratio for South Africa but Jacques du Toit, a property analyst at Absa Home Loans, said each bank can use its own data to calculate house price-to-income ratios, as well as mortgage repayment-to-income ratios. Based on these calculations, affordability has improved.

But he warns this may not necessarily show a trend for the country as a whole, and there is no breakdown according to income ­categories, which would provide more detailed house price-to-income information.

“Disposable income relative to house prices or mortgage interest rates — these are relatively simple calculations, but they are not the only factors,” Du Toit said. Other important factors include employment, the level of household savings, living costs and debt levels.

The situation in other countries can differ greatly depending on housing supply and on interest rates.

Furthermore, he said, “one must also take into account factors like confidence levels, the outlook for the economy going forward and how will that influence the ­property market”.

In its most recent findings on housing affordability, FNB found, according to two affordability ­indices, the picture had continued to improve in the final quarter of last year.

One index looks at the price in relation to disposable income, and the other at the loan instalments in relation to disposable income.

Both affordability indices were driven lower by a slow average house price inflation rate of only 1.8%, which had dropped from 7.2% year on year in the final quarter of 2015. But disposable income per person grew by 5.8% year on year as at the final quarter of 2016, FNB said.

Simultaneously, there has been no interest rate movement since the first quarter of 2016, meaning that interest rates have played no role in the improved loan instalment measure.

But following President Jacob Zuma’s Cabinet reshuffle and South Africa’s debt subsequently being downgraded to junk, it is feared that rising interest rates could affect the affordability of housing.

“What has happened recently created a lot of uncertainty and it is not clear how a lot of these things will play out,” Du Toit said.

In terms of inflation, the rand exchange rate is now the biggest risk to the economy.

The currency weakened from R12.30 to the dollar before rumours of the reshuffle took hold to R13.90 after Fitch was the first to downgrade South Africa’s local and foreign debt to junk.

The Reserve Bank, which uses interest rates to target inflation, is unlikely to be in a position to cut interest rates any time soon. “They are likely to remain for some time, at least at these levels for the rest of the year,” Du Toit said.

If costs rise and cut into consumption expenditure — an important driver of economic activity — gross domestic product growth for the year will be hit, Du Toit said. 

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