“Affordability of property is reflected by the ratios of house prices and mortgage repayments to household disposable income,” explains Mike van Alphen, National Manager for Rawson Finance, the Rawson Property Group’s in-house bond originator. “When house prices and mortgage repayments increase faster than disposable income, purchasing or paying off a property becomes much less affordable.”
According to ABSA’s report, the fourth quarter of 2014 saw a nominal house price growth of 9.6%, year-on-year, and nominal income growth of only 7%, year-on-year, while the mortgage interest rate remained unchanged at 9.25%. While these figures aren’t the only factors affecting the affordability of residential property, they are clear indicators of the tough financial climate property buyers were entering into late last year.
If we look towards 2015’s projected figures, first glance implies that things may actually be improving for property buyers. Nominal house price growth is predicted to decrease to 6.6%, while income growth is expected to remain at 7%, according to a recent survey by ECA International. Taken on their own, those two figures imply that affordability should be increasing. “The catch,” says van Alphen, “is the mortgage interest rate, which is predicted to increase to an average of 9.5%, up from 2014’s stable 9.25%.”
How much does the interest rate really affect property affordability? Let’s take a look at an average South African family buying their first home and see.
Stats SA asserts that South Africa’s average gross monthly wage in January 2015 was R14 911. Assuming a two-income household, this produces a gross household income of R29 822.00, which would, in theory, qualify our hypothetical family for a maximum bond of R975 500. (Interestingly, the average house price for the same period was reported to be R1 291 300. That’s R300 000 more than our average family can afford.)
“The quick rule of thumb for estimating the maximum bond you would qualify for,” says van Alphen, “is to calculate 30% of your gross monthly income as your monthly repayments. If you earn just under R30 000 per month, you should be able to afford just under R9 000 per month on your bond – as long as you don’t have above-average expenses or a high risk profile.”
Assuming both earners in our family are given the predicted 7% wage increase during 2015, their combined monthly income a year later should have increased to R31 909.54. This means they should be able to afford a maximum monthly bond repayment of R9 572.86. At the higher interest rate of 9.5%, predicted to come into effect in 2015, that qualifies them for a maximum bond of approximately R1 027 000.
Of course, property prices would have increased during the year as well, at a rate of 6.6% if ABSA’s predictions are correct. That means a property our family would have paid R975 500 for in January 2015, is likely to cost them at least R1 040 949 in January 2016 – now R14 000 more than their maximum possible bond, and out of their financial reach.
“One also needs to remember,” van Alphen adds, “that transfer and bond fees aren’t covered by the bond, and will need to come out of savings. On a R1 million purchase, those fees are around R50 000.”
With increasing inflation, decreasing household savings and the resulting increase in credit-risk profiles adding pressure to the situation, it looks like our average South African is going to find property affordability taking a notable dive in the near future.
Van Alphen’s advice to prospective buyers is to start saving now. “The more money you can put down as a deposit, the less you have to borrow,” he says, “which helps minimise the effect of the expected interest rate hike. It’s never too late to start planning for your future home.”
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