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Buyers battle with home affordability

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05 Feb 2013

The affordability of housing remained favourable during the course of 2012, reflected by the ratios of house prices and mortgage repayments to household disposable income, says Absa.

Households’ outstanding mortgage debt was 54 percent of total debt balances in Q3 2012 from 54.5 percent in the preceding quarter and the cost of servicing household mortgage debt as a percentage of disposable income was 3.5 percent from 3.7 percent in Q2 2013.

According to the Absa Housing Review Q1 2013, this was the net result of trends in house price and income growth while the mortgage interest rate was on average somewhat lower in 2012 compared with 2011.

Writing in the report, Jacques du Toit, Absa Home Loans property analyst says many households’ ability to take advantage of the improved housing affordability continued to be affected by factors such as income, savings, living costs, debt levels, as well as credit-risk profiles (as reflected by the state of consumer credit records), the National Credit Act and banks’ lending criteria in the case of the need for mortgage finance to buy a home.

He explains that a downward/upward trend in the abovementioned two housing affordability ratios implies that house prices and mortgage repayments are rising at a slower/faster pace than household disposable income.

The result is that housing is in effect becoming more/less affordable, says Du Toit.

He points out that the value of outstanding mortgage balances in the household sector showed growth of around 3 percent y/y towards the end of 2012, reflecting of the state of household finances, consumer credit records, consumer confidence and residential property market conditions in general.

The ratio of outstanding household mortgage debt to disposable income was 41 percent in Q3 2012 from 41.4 percent in Q2 2013 as a result of quarter-on-quarter growth of 0.7 percent in household mortgage debt and growth of 1.7 percent in nominal disposable income.

Households’ outstanding mortgage debt was 54 percent of total debt balances in Q3 2012 from 54.5 percent in the preceding quarter and the cost of servicing household mortgage debt as a percentage of disposable income was 3.5 percent from 3.7 percent in Q2 2013.

Over the short to medium term, the household sector is set to be plagued by high levels of debt (impacting the ability to take up further credit), the lack of savings (impacting the ability to pay a deposit on a property or a vehicle when applying for mortgage or vehicle finance), and impaired credit records (limiting the accessibility of credit).

Du Toit says this was because of growth in household mortgage debt and nominal disposable income, impacting the mortgage debt ratio, as well as a lower mortgage interest rate in the third quarter.

On interest rates, he says because lending rates (banks’ prime and variable mortgage rates currently at 8.5 percent per annum) are at their lowest level in almost four decades and monthly mortgage repayments are in general 35.9 percent lower compared to early December 2008, when the mortgage rate was 15.5 percent.

“Low interest rates favour the affordability of mortgage finance, supporting the demand for housing and consumers’ ability to take up credit to buy property.”

Absa says growth in real household disposable income is forecast to slow down to 3 percent in 2013 from an estimated 3.6 percent in 2012, impacted by inflationary pressures and expected moderate employment growth.

“Growth in real household consumption is forecast at 3.3 percent this year, remaining closely correlated with income growth,” says Du Toit.  

With lending rates projected to stay at current low levels until mid-2014, many households will continue to make use of credit to fund consumption expenditure, with the result that the ratio of debt to income is forecast to rise to around 78 percent by the end of 2013.

The cost of servicing household credit as a percentage of disposable income is expected to remain under control in view of continued low interest rates.

Over the short to medium term, the household sector is set to be plagued by high levels of debt (impacting the ability to take up further credit), the lack of savings (impacting the ability to pay a deposit on a property or a vehicle when applying for mortgage or vehicle finance), and impaired credit records (limiting the accessibility of credit), he adds. – Denise Mhlanga

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