Mkhwanazi used Standard Bank’s mortgage applications data to assess how the affordability of homes for first-time buyers has changed since 2006, from both a structural and a cyclical perspective, by tracking Standard Bank’s two affordability indices for median first-time buyers i.e. SBR’s price-to-income ratio (PTI) and instalment-to-income ratio (ITI). As part of its cyclical affordability assessment, Standard Bank also monitors the size of a median loan granted as ratio of the purchase price, or loan-to-price index.
With a focus on first-time buyers, the study can be interpreted as a “means test” for the average aspirant first-time buyer accessing the mortgage market. Comprising 19% of net household wealth (as at 2015), residential assets are an important determinant of SA’s consumptive capacity and driver of living standards.
In the first quarter of 2016, the median first-time buyer earned approximately R29,000pm, and falls within Standard Bank’s Emerging Middle Income group, i.e. with household income of R16,418 – R33,333.
Analysing income, house price and instalment trends for first-time buyers over the last decade, the study shows that mortgage affordability has structurally improved. This is largely due to the median income of a first-time buyer growing faster than the median price of a house demanded by a first-time buyer, combined with historically low interest rates. With house prices lagging income, and interest rates remaining low, thus anchoring the cost of servicing a mortgage, a median first-time buyer is in a relatively better position to acquire and pay for their home than they were a decade ago.
However, from a business cycle perspective, affordability is worsening, because GDP growth is slowing and SA has entered a downward phase of its business cycle. GDP drives income and the demand for mortgages, as well as banks’ appetite for risk and consequently the supply of mortgages.
The report notes that in the last downward phase of SA’s business cycle, income growth took a while to respond to slower GDP growth. In keeping with this trend, as SA entered the latest downward phase of its business cycle in December 2013, income growth continued to rise for almost two years, and began slowing in Q3 2015.
From a supply of mortgages perspective, the report finds that the average loan-to-purchase price (LTP) leads GDP growth, indicating a forward-looking approach in bank lending practices. A median first-time buyer generally qualifies for a smaller loan as a percentage of the purchase price as GDP slows and interest rates rise. In the current cycle, the loan-to-purchase price started declining in Q3 2013.