Affordability of the average-priced house based on the average person’s income growth has deteriorated over the past decade. However, a different calculation of affordability based on the number of people that can afford the average-priced house shows an improvement in affordability over the past decade, especially on new housing stock. This is a somewhat different story to what many seem to believe, i.e. that less and less people are able to afford houses, and better explains why the property market has inflated so strongly.

Nevertheless, while the middle class numbers have grown, the fact that the average person’s income has not kept up with house prices would suggest the need for some correction in the market. In a situation without urban land scarcity one would have probably expected a downward price correction. However, we are moving steadily into an era of urban land scarcity, driven by infrastructure and service constraints as well as the gradual emergence of policies aimed at curbing urban sprawl. Such land supply constraints, not to mention building sector constraints mounting as the great fixed investment boom gets under way, would make downward price corrections unlikely in these times of steady growth in middle class numbers.

Rather, urban densification in the form of house size and stand size adjustments (declining) seem the far more likely route. I believe that 2007 has been the year in which we have seen the residential property market begin to adjust more significantly to the deterioration in the traditional measures of affordability, with average size of new units completed now declining steadily.

This implies that households on average will continue to pay more for housing in future, but that the rate of increase will be curbed by having them pay “more money-for-less house”. The big question – are we preparing sufficiently for the challenges of far higher living density, for instance in terms of mass public transport or more public open space?

Article by: John Loos FNB - www.fnb.co.za