Gina Schoeman, Economist at Macquarie First South Securities, considers the implications of the rising costs of utilities on the decision to purchase a new home.
I recently hosted a dinner party at my house. The man in my life arrived
sufficiently early to help me set up the evening's cuisine and before we could
even lay the table, my house had a blackout. And I say this without much
surprise because, let's face it, the lack of electrical power in South Africa is
no longer anything short of ordinary. This made me think about the increase in
the price of utilities and how this may affect the decision to purchase a home.
Since 1994, electricity prices have run below the average inflation rate.
However the rate has been ticking up a bit of late, from a 2.5% increase in 2004
to a 4.1% increase in 2006 to this year's 5.1% rise. And while this contributed
to the July surge in inflation, the increase is still quite moderate.
The worry for the prices that consumers pay (even though the reality is that our
electricity prices are still well below world standards) is that Eskom is asking
for an 18% increase in electricity prices for 2008/09 and 2009/10 in order to
fund its capital expenditure. The impact to overall CPIX would be an extra 0.6 %
each year (which is significant when compared to the normal 0.2 % recorded in
2005 and 2006). Indirectly, higher electricity prices also affect a broad range
of industries as they take these higher costs into their prices; which
inevitably lands in the consumers pockets.
Assessment rates heading on the back of higher house prices
Each month, municipalities send out statements charging for electricity and
water supplies, and for property taxes. Based on the land value of a property,
the assessment rate is then calculated. According to the Absa House Price Index,
the average house grew 200% from June 2001 to June 2007, measuring almost 36%
Year on Year at the peak of the housing boom in mid-2004. We can therefore
expect property valuations to increase significantly in value, and for rates to
be adjusted upwards correspondingly.
According to the City of Johannesburg, a house with a valuation of R300 000 in
2001 would have been obligated to pay R1 231 per month in rates. However, if
that same property were re-valued now, and new rates applied, these would almost
triple to R3 700 per month.
Rates in Cape Town rose sharply in July - and this will impact on recorded
inflation in the next six months. Similarly, Johannesburg is also planning
marked rate increases.
Rental demand is rising… rental prices are too!
It is important to watch fluctuations in the residential rental market, as sharp
increases will impact inflation through house, flat and town house rentals. A
healthy, strong and growing property market meant that people focused largely on
buying a house, which decreased the demand for rental properties. Figure 3 shows
that though a middle income house has doubled in value, thus resulting in an 80%
increase in mortgage repayments since 2002, the rental the same property could
attract does not cover the bond and is up only 25% in the same period.
In the graph below (figure 4), it is easily seen how the rental market suffered
as bond sizes increased; making it more difficult to match up monthly mortgage
instalments with rental yields.
With house prices up 200% in the past four years, and interest rates up 300bp,
many first-time homebuyers are finding it very difficult to enter the housing
market. Therefore some may now opt to rent, which should boost rental prices
over the next year. Add to this, stricter requirements on mortgage lending
following the implementation of the National Credit Act in June 2007, and these
factors will no doubt apply upward pressure to the rental component of CPIX in
And so, it is clear that as the economy grows, as house prices rise, and as new
infrastructure is required, we as consumers will have to foot the bill. And,
perhaps we have been spoilt in the past with significantly low electricity
prices, lower-than-market-value property rates and being one of the few nations
in the world where urban tap water is drinkable. These are simply the normal,
yet necessary, price increases that are established in the transition from a
developing to a developed economy.
As for the dinner party… despite the fact that a total of 23 candles seemed to
create a cosy ambience and I'd already worked out that the sweet chilli chicken
could be done on a braai, the man of the house scooted out and found an
electrician. We were left with quite a substantial bill but, the problem was
remedied for the night. (However, I did find myself looking up the price of