Decline in home ownership needs to be addressed

Consumers may have stepped into 2024 hopeful for a financial reprieve as food inflation eased towards the end of 2023. Regretfully, the reality is that the consumer has had to contend with petrol price hikes and its knock-on effect on factors that contribute to the rising cost of living.

There may have been a sigh of relief with consumer price inflation (CPI) declining in March to 5.3% from 5.6% in February. It puts Q1 2024’s inflation average at 5.4%. However, I would caution that it is still too high for us to start predicting a turn in the interest rate outlook — something that most households are so eagerly anticipating in Q2.

To worsen things, housing — a key element of the CPI basket — is blowing wind in an unwanted direction. Housing encompasses rental prices, measuring the cost increases in the provision of human shelter, as well as utilities in the form of water and electricity prices.

Beginning with the latter: administered prices remain a concern for the inflation outlook as we look ahead at the remainder of the year. In March alone, inflation on electricity and other fuels increased 15.3% year on year, this before the introduction of the 12.7% tariff increase that kicked in on April 1. Less dramatic is the rise in water and related services, up 7.9% in March.

What may be alarming about inflation on housing (rent and owners’ equivalent rent) is how closely related it is to the interest rate changes. When rates go up, it costs more to keep a roof over one’s head if one has a mortgage. When demand for rental accommodation — initially a more affordable alternative — increases, this in turn drives rental prices up. Housing inflation then rises, and with a combined weighting of 16.5% (rent and owners’ equivalent rent) on the CPI inflation basket, so does overall CPI inflation. On the upside, these two rental components have remained within the target band, both resting at 3.3% in March, but it has been gradually ticking up since mid-2020, slightly lagging the rate upcycle.

With the uptick in the repo rate over the past three years, the residential property market has seen dwindling demand, making rental property a more viable option for many due to affordability.

In the National Credit Regulator’s latest “Consumer Credit Market Report”, credit granted to mortgages had declined a significant 26% year on year (Q3 2023).

Based on Stats SA’s general household survey (2013-22), we generally have a 30% renting, 60% owning ratio for dwellings. The remaining 10% represents other accommodation structures. This ratio changed dramatically during the

Covid period, assisted by the change in living conditions and a low interest rate environment. In 2020, property ownership, which includes those owning a financed property, rose to 71% while rental declined to 18%. The NCR reported a 43.3% year-on-year rise in mortgage advances in Q4 2020.

The rental:ownership ratio has since reverted to previous levels. The 2022 general household survey reported that 23% of households were now renting, while 63% are in owned structures. Without downplaying other factors, such as the cost-of-living crisis, interprovincial migration and the return to office work, it is more likely a question of affordability that has made a significant proportion of households seek to purchase a property, and then abandon this longterm investment in a short period of time.

The social impact is that the lowest earners lose the opportunity to own property.

Mortgage rates are not solely the function of the repo rate and in the age of AI, there is room to explore and experiment with new ways of pricing risk to achieve improved affordability, access and better socioeconomic outcomes.

One example in achieving this is Fairplay AI (US based) which is helping companies to “reduce algorithmic bias for people of historically disadvantaged groups”, according to its website.

While the inflation outlook remains fragile, it is encouraging to know that we are living in the age of rapid technological progress that can help us to think differently about our developmental challenges. And in an era where financial institutions take the “S” in ESG (environmental, social and governance) issues seriously.