First-time buyers have played an increasingly important role in the South African residential market in recent years. Data released by ooba – South Africa’s largest bond originator - reveals that in mid-2007 fewer than 40% of all new bonds facilitated by the company were for first-time house buyers. However, this percentage rose steadily during the next few years, reaching a peak of approximately 56% by late-2014.
The increasing presence of first-time buyers in the housing market was attributable to a number of factors including the reduction of interest rates in the wake of the 2008/09 recession to 40-year lows as well as the steady improvement in the affordability of housing, as growth in household incomes outstripped house price inflation between 2007 and 2012. (Affordability is calculated as the ratio of house prices to household disposable income).
The growing presence of new home owners in the property market was seen as an extremely positive development – not only because homeownership is widely acknowledged as an important source of wealth creation for individuals but because the growing number of new market entrants provided a strong underpinning for the overall property market.
Given that the average price paid for a house by first-time buyers was approximately R745 000 last year, the impact of the increasing demand from first-time buyers was evident in the acceleration of house price inflation in the lower-price band (under R1 million). House prices in the lower-price band accelerated steadily from 2012 onwards, even as house price inflation in other, higher price bands lost momentum.
The lower-price band continues to register the strongest house price inflation in 2015, with prices increasing by 8.7% in May and averaging 8.45% during the year to date. This compares to an increase of just 5.7% in national house prices in May and of 6% during the first five months of the year. However, growth in house prices in the lower-price band is beginning to lose momentum – suggesting that house price inflation in this category will soon begin to slow – bringing it into line with the easing evident in the other, higher price bands.
The loss of momentum in the lower price band may well be attributable to the fact that the proportion of new bonds being awarded to first-time buyers peaked in the final quarter of last year and has since begun to decline.
In part this may reflect the gradual deterioration in housing affordability seen since late-2012, as the recovery in house prices began to outstrip growth in household disposable income. However, another contributing factor is undoubtedly the fact that households are beginning to feel the pressure of the deteriorating local economic environment as they face of rising costs, heightened job insecurity and the prospect of further interest rate hikes.
Combined with the deterioration in housing affordability, it is hardly a surprise that the proportion of first-time buyers in the market is beginning to decline. This will remove an important source of demand for houses in the lower-price band.
It is, however, important to recognise that although housing affordability in South Africa has been deteriorating for some time now, local housing remains relatively affordable by international standards – particularly when compared to housing affordability in countries like Australia and Britain. For example in Britain, the average cost of a home is currently £195 000 (roughly R3.75 million) while in Australia, the average price of a home is now almost AU$660 000 (approximately R6.2 million). Prices in major cities – such as London and Sydney – are even more expensive, resulting in a growing proportion of middle, and even upper-middle, income households in these cities finding themselves effectively locked out of the housing market.
By comparison, ooba estimates that the average price paid for a South African house thus far this year was just over R1 million (roughly £52 000 or AU$106 000). Given that local houses are typically more spacious and are set on larger stands than those in the UK, the affordability of South African housing remains relatively attractive by international standards.
Prepared by Sandra Gordon | Research and Market Analyst at Pam Golding Properties