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.

Since the first quarter of 2008 the average price/average income ratio index is estimated to have fallen 13 percent to the second quarter of 2009 (average remuneration inflation was assumed to be the same as Q1, due to labour data only being available up until Q1 2009), while the instalment repayment/average income ratio is estimated to have fallen by a larger 25 percent over the period due to the additional contribution of five percentage points? worth of interest rate cuts since late-2008.

In other words, both measures of affordability are estimated to have dropped back (improved) to levels last seen in the second half of 2004. A significant portion of the property boom?s affordability deterioration has thus been 'corrected', although by no means all of it.

How much further does the affordability 'correction' go and what level of affordability is appropriate?

Back at long term average

In order to get a better perspective of where we are in terms of affordability levels, it would perhaps be better to go back a few decades. Absa has maintained house price data since the 1960s, giving us the ability to analyse long term trends. Examining the long term trend back to 1970 (can?t go further back because wage data only starts in 1970), it has become apparent that after the decline (improvement) in both measures of affordability since last year, by the first quarter of 2009 both measures were very close to the long term (1970 to Q1 2009) average affordability level.

For those who believe that long term trend averages should be the level to which a market should always return, that should signal that the recent market 'correction' has more-or-less been completed. For those who see the very good affordability levels of the late 1990s as 'normal', implying that this decade?s property boom was perhaps 'irrational', the 'correction' still has a long way to go before being completed.

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