Real buying power is the key to effective home pricing
Category RealADVICE
The good news is that employment numbers in SA have risen in the past year*. The bad news is that the average take-home pay - or the income that salary earners actually have at their disposal - has not even kept pace with inflation.
"Consumers are thus on the back foot financially, and what this means in real estate terms," says Gerhard Kotzé, MD of the RealNet national estate agency group, "is that while the demand for home ownership continues to increase, and the banks are still keen to grant new home loans, the real purchasing power of the average home buyer has declined. This is a very important consideration for homeowners who are trying to decide on an asking price for a property they wish to sell."
According to the latest available figures from StatsSA, the average gross salary in South Africa was R24 813 a month in the third quarter of 2022, or about 3,8% higher than the average R23 908 paid in the same period of 2021.
However, according to the latest Take-Home Pay Index from BankservAfrica, which is the biggest automated payments system operator in SA, the average nominal take-home pay in December 2022 was R14 633 - or 4,8% less than the R15 403 recorded in the same month of 2021.
And in 2022 as a whole, the nominal take-home pay (after tax, pension, medical and other deductions) averaged R15 055 a month, actually dropping from R15 166 a month in 2021 at the same time as consumer inflation was rocketing to an average of 6,9% for the year and interest rates were being raised to try to combat that rapid increase.
"The result is that the average household disposable income, which has remained virtually unchanged for a year, now has to stretch much further to cover the higher cost of most goods and services, as well as higher repayments on all forms of debt. This of course reduces the ability of tenants to afford any rent increases - and also shrinks the amount of disposable income that prospective homebuyers would have free to cover a monthly bond repayment," he says.
"What is more, we don't see much prospect of this situation changing for at least the next 12 months, because low economic growth - now forecast by the Reserve Bank to reach just 0,3% in 2023 - will mean more job insecurity and limit the ability of salary earners to negotiate increases. And while the rate of inflation is expected to drop somewhat, households will probably still have to contend with steep electricity tariff hikes and at least one more interest rate increase."
Turning to what this means in practical terms, Kotzé says that at the current base home loan rate of 10,75%, "the average two-income household applying for a 20-year loan for 100% of the purchase price would theoretically be looking at a maximum home purchase price of around R1,45m, if one were to use the old rule of thumb that your bond repayment should not be more than a third of your gross salary.
"However, that would put the monthly bond repayment at R14 700, or more than 50% of the actual disposable income available to that household, and many lenders might consider this percentage too high and refuse to grant a loan for that much - unless the buyers had no other debts to pay and could show that they were easily able to cover their other monthly expenses such food, transport, school fees, insurance and utility costs out of the other half of their joint disposable income.
"It must also be said that while the number of loans being granted by the banks is still increasing, they have tightened their credit criteria in the past few months to ensure that borrowers do not become over-indebted in the face of interest rate and cost of living increases."
Consequently, he says, the buying power of the average two-income household is likely to be considerably below R1,45m at this stage, unless the buyers are able to pay a substantial deposit in cash or from the sale proceeds of an existing property.
"And this shows how vital it is for home sellers to look at things from the buyers' point of view as well as their own - and work with a property professional who will assist them to calculate what income any prospective buyer would really need in order to qualify for a home loan to purchase their property.
"Together they will then be able to determine the target audience for the property with much greater accuracy, so that they can set an asking price that is likely to attract the highest number of willing and able buyers, and result in a sale within the shortest time frame."
*The latest figures from StatsSA show that 204 000 jobs were gained between the second quarter of 2022 and the third quarter, and that a total of 1,22m new jobs were created in the first nine months of last year. The official unemployment rate declined by 1 percentage point in the third quarter, to 32,9%.
Author: RealNet
