Affordability of Housing

Private Property South Africa
Jacques du Toit

A generally accepted method to determine how the affordability of housing has

changed over time is to calculate the ratio of house prices to household income.

During the past few years, the nominal year-on-year growth in house prices

outstripped that of gross household income by a large margin. This resulted in

the ratio of house prices to household income increasing from a relatively

stable 4,0 times on average during 1996 to 1999 to 4,5 times in 2000, and as

high as 7,2 times in 2004 (see graph 3). With house prices having risen faster

than household income since 2000 (see graph 2), housing has, in general, become

increasingly less affordable during the past few years.

The ratio of house prices to household income has increased without exception in

each province, metropolitan area and rural region in the country since 1996. In

some regions (especially the rural areas) this ratio increased sharply to

relatively high levels in recent years. This was mainly the result of generally

low annual growth in household income in these regions over this period, whereas

the level of household income in the metropolitan areas was, on average, also

much higher than in the rural areas.

Despite the fact that the Western Cape and Gauteng have some of the highest

house prices in the country, their ratios of house prices to household income

have remained relatively low up to 2004 (6,1 and 4,7 respectively) compared with

some other provinces, such as the Eastern Cape with a ratio of 10,6, Limpopo at

8,3, North West at 7,7, KwaZulu-Natal at 7,6 and the Free State at 7,5. The

ratios of these five provinces were above the country average of 7,2 in 2004

(see graph 4).

In various provinces, the ratio of house prices to household income has

increased at a much faster rate than in Gauteng and the Western Cape since 2000.

The main reason for this is that the levels of household income in the Western

Cape and Gauteng are, on average, significantly higher than in most other

provinces (see graph 1), whereas Gauteng has also recorded the highest growth in

household income of around 9,5% per annum during the past five years.

During 2000 to 2004, the affordability of housing has decreased rapidly in

provinces such as the Eastern Cape, North West, the Free State, KwaZulu-Natal

and Limpopo. The result is that, in terms of house prices in relation to

household income, residential property can be regarded as expensive in these

provinces compared with the rest of the country.

Whereas residential property prices have increased quite significantly in most

of the abovementioned few provinces in the past five years, the significant

changes in respect of the affordability of housing in these regions can also be

ascribed to gross household income increasing by only 5,5% per annum in nominal

terms in the Free State, Limpopo and the Eastern Cape during this period. Growth

in household income was around 6,5% per annum in North West in 2000 to 2004,

whereas it came to about 7,5% per annum in KwaZulu-Natal during the same period.

In the metropolitan areas of greater Johannesburg and Pretoria, housing was more

affordable than in any of the other urban areas around the country (see graph

5). This can again be ascribed to household income levels being the highest in

these two metropolitan areas, despite them having some of the highest house

prices in the country.

Conclusion

In view of rapidly rising house prices in general during 2000 to 2004, the

affordability of housing has become an increasingly important issue over this

period. The ratio of house prices to household income in South Africa was at a

level of 4,5 in 2000. It increased to 7,2 in 2004 and rose to significantly

higher levels in certain provinces.

This implies that housing in these provinces has become much less affordable

than in provinces experiencing a relatively high level of house prices, together

with a high level of household income, such as Gauteng and the Western Cape.

Another important reason for this development is that household income in most

provinces has increased at a slow pace from relatively low levels compared with

Gauteng and the Western Cape during the past five years.

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