More property analysis by John Loos:

• Analysing CT property

• Analysing Jozi property

• Analysing PE property

• Analysing PTA property

• Analysing Durban property

Some claim that housing in South Africa has become 'unaffordable', that prices are crazy, and that ultimately there must be a massive 'downward correction', perhaps back to the dirt-cheap 1998/99 levels prior to this decade’s property boom.

But just how badly has housing affordability really deteriorated? Firstly, it would be too simplistic to merely use the cumulative rate of price increase over the boom period as an indicator of affordability deterioration. Also, when wanting to examine the real change in house prices, it would probably be more desirable to use average remuneration (wage) or income with which to deflate nominal house prices as opposed to using the consumer price index (CPI), as CPI is not as good an indicator of home purchasing power changes.

So, at the very least, there are three key variables that must be included in any housing affordability calculation. These are, firstly, house price change, secondly, income change, and finally, because so many people use credit to purchase homes, the cost of credit or, otherwise put, interest rate changes.

For cash buyers, the average price/average remuneration ratio is all-important. For the credit buyer, the instalment repayment value on a 100 percent loan on an average-priced house/average remuneration ratio, is a better indicator of affordability trends.

Affordability deteriorated during boom years

There can be little doubt that during the main boom years earlier in the current decade, both measures of affordability showed a massive increase (i.e. deterioration).

Using the FNB House Price Index, which dates back to July 2000, to the peak of the House Price Index’s existence in February 2008, the cumulative house price inflation that took place was estimated at 192.8 percent. By comparison, average nominal remuneration per worker (used as a proxy for average income) as reported by the SARB, rose cumulatively by a lesser 81.3 percent. The net result was that the average price/average income ratio index rose significantly by 62 percent from the third quarter of 2000 to its peak (worst level of affordability) in the first quarter of 2008.

The second measure of affordability, which brings interest rates into the equation, showed a cumulative increase over the same period that was almost exactly the same as the first measure, although it stayed lower for longer due to the prime rate remaining low at 10.5 percent until mid-2006. From the third quarter of 2000 to the first quarter of 2008, the cumulative increase in the instalment repayment on a 100 percent loan on the average priced house, expressed as a percentage of average income, was also 62 percent.

Since the first quarter of 2008, however, we have seen a considerable improvement in both measures of affordability, due to the combination of house price deflation and substantial interest rate cuts.

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