It may be ‘slightly harder’ to afford to buy a home

Prospective home-buyers may find it slightly more difficult to afford a property this year than in 2014, because growth in wages and salaries will not keep pace with the expected nominal growth in residential property prices of between eight and nine percent. This is according to the market analytics and scenario forecasting unit at First National Bank (FNB) Home Loans.

Over the past three years, there has been an improvement in the demand for residential property relative to supply and a decline in the average time that properties are on the market before being sold, FNB says.

Although it is expected that more residential dwellings will be completed this year, FNB says it does not believe that new stock will come onto the market in time to prevent slightly higher property price inflation in 2015. “As such, we expect a further acceleration in average house price growth into the eight-to-nine percent range, and do not believe that average employee remuneration will follow suit.”

FNB says recent data indicates that residential property started to become “mildly” less affordable in 2014, after the dramatic improvement in affordability between 2008 and 2011, as interest rates fell and house price growth was “anaemic”. In 2012, the residential market started to strengthen, house price inflation became more rapid, interest rate cuts came to an end and then interest rates rose slightly.

The FNB House Price Index shows that property prices grew by an average of 7.1 percent in 2012, 6.8 percent in 2013 and 7.1 percent in 2014. In real (after-inflation) terms, the annual average growth was 1.31 percent in 2012, 0.95 percent in 2013 and 0.79 percent in 2014.

The index measures average price changes from month to month using transaction data from homes financed by FNB. The index segments the property market by type of ownership (full title or sectional title), number of rooms and building size, with different weightings accorded to the different sub-segments.

In real terms, the FNB House Price Index for November 2014 was 18.7 percent down from its level in December 2007, when the property boom of the previous decade peaked. In nominal terms, house prices were 24.4 percent higher in December 2014 than they were in December 2007.

Looking at price performance over the past 10 years, the FNB House Price Index was 2.6 percent higher in real terms in December last year compared with December 2004, and it was 80.2 percent higher in nominal terms.

FNB says its expectation that nominal average house price inflation will be eight to nine percent this year is based on the recent sharp fall in the price of oil, a decline in global food prices and a “reasonably well-behaved” rand. These factors have resulted in a significant fall in imported goods inflation, which, in turn, has been the catalyst for overall inflation to fall back to below six percent, which is the upper limit of the South African Reserve Bank’s inflation target, FNB says. Not only has this reduced the pressure on the Reserve Bank to hike interest rates, but, more significantly, a decline in inflation can translate into a growth in household disposable income. Growing household disposable income is good for the property market, because it means households have more money for servicing home loans or saving for a deposit on a property.

FNB cautions that the risks to this optimistic forecast are extensive disruptions to the electricity supply and a growth in the current account deficit.

FNB says that, with the Reserve Bank “continually signalling” its intention of normalising interest rates from their abnormally low levels, the prime rate could increase by 75 basis points by the end of 2015, from 9.25 percent to 10 percent. But the slump in oil and food prices has increased the likelihood that rates will not be hiked this year, FNB says. – Independent Online