The softening labour market in South Africa is stoking affordability concerns in the residential property market.
According to Siphamandla Mkhwanazi, economist at Standard Bank, 2016 is set to become the worst-performing year for residential property since at least 2012.
Standard Bank House Price Index slowed to 6.3% year-on-year in November, from a slightly upwardly revised 6.9% year-on-year in October.
YTD house prices per square metre are up only 5%, compared with 14% in 2015. The HPI has underperformed by 3% versus 2012, 19% versus 2013 and 9% versus 2014 and 2015 respectively, the bank said.
“Growth in house prices has been moderating for the past five months on tougher economic conditions and reduced consumer and business confidence as political uncertainty has increased,” said Mkhwanazi.
The labour market softened further in Q3; unemployment rose to a historical high of 27.1%.
Salaries and wages are a primary source of income for 63% of SA households, highlighting the importance of a healthy labour market and the lack of income diversification.
Low-emerging middle income households (R89,001 and R202,500 p.a.), through to realised-middle income households (R412,001 and R707,000 p.a.) are the most affected by labour market turbulence, said Standard Bank, as they have an even higher dependence on salaries as a primary source of income – 84% to 89% of their income is sourced from salaries.
“Affordability is expected to continue impacting adversely on the demand for and supply of mortgages, and ultimately on property prices,” said Mkhwanazi.
“Although improved moderately from Q2, the MMI/BMR Consumer Financial Vulnerability Index (CFVI) for Q3:16 shows that consumers spending more than what they earn, coupled with too much existing debt and poor financial planning, are the main reasons for consumer financial vulnerability levels,” the economist said.
Within household credit, mortgage advances – 60% of total – slowed for the fourth consecutive month to 3.4% year-on-year.
Standard Bank noted that the weighted median price per square metre rose slightly, by 0.3% month-on-month to R4,400, from R4,385 in October, Standard Bank said. The per square metre prices seem to have recovered the losses suffered in August 2016 after the local government elections when prices dropped from R4,360 in July to R4,170 in August, or -4.3% m/m.
The median price of a freestanding house applied for and approved by Standard Bank was R1,000,000 in November, up from R950,000 in October 2016.
The median price of a flat/townhouse was R799,900, down slightly from R800,000 in October, while the weighted median price of the two was R910,095, up from R904,750, in October, or 0.6% month-on-month.
“We believe that purchasing activity will continue to point to subdued demand due to rising political uncertainty, slowing growth of disposable income, a tightening labour market, and tight financial conditions,” said Mkhwanazi.
“We expect consumers to remain under pressure into 2017, with household expenditure only recovering in Q3:17 once the SARB starts cutting interest rates. Commensurately, we remain bearish on property prices for the remainder of 2016 and into 2017.”