HOUSING MARKET HIT

Increased electricity costs and the knock-on economic

BY JOHN LOOS

ELECTRICITY is a key operating cost for homeowners and, since around 2008, the cost has been escalating at a rapid rate.

The consumer price index for electricity rose by a massive 447% in the past 15 years, far outpacing how income has been rising, and it shows the extreme electricity-affordability deterioration over the past 15 years.

However, this is not the end of the direct cost impact for homeowners.

The deterioration in reliability of electricity supply means that many homeowners are required to incur additional costs on solutions aimed at improving their electricity-supply reliability.

This can include inverters or solar solutions, to name but two.

Reliable electricity supply has become significantly more important in recent years, for the larger number of employees who spend increased amounts of time working remotely too.

But there are the potential indirect impacts of more expensive and less reliable electricity supply.

Modern economies depend heavily on power supply. The recent heightened levels of the impact of load shedding on economy-wide output/production, in turn, impacts negatively on employment and household income growth. This represents the purchasing power for homes, and less purchasing power (all other things equal) means less homebuying.

The main potential impacts on the housing market:

1 At a macro level, the electricity crisis is a negative influence on housing demand, due to its negative impact on the economy. In the short run, it disrupts economic output directly. In the long run, it dampens investor confidence and thus investment in the economy, while creating negative sentiment that exacerbates South Africa’s skilled labour emigration rate.

All in all, therefore, it is an economic negative, and an economic negative is a negative for housing demand.

2 Moving down to the more micro level, the direct impact on household disposable income spent on rising power-supply costs means less available income to service a bond or buy a home cash. This means that home demand is probably dampened by this too, or at least it causes many buyers to have to go for cheaper and smaller homes than would otherwise be the case.

3 The electricity-cost challenge will probably escalate the move towards greater urban densification, because smaller residential units, where common amenities can be shared, improve the efficiency of scarce land use and can also contain operating costs, electricity being a key one.

4 In addition, the electricity-supply crisis, coupled with challenges regarding other utilities and municipal services, appear to be leading to an escalating search for regions/towns/suburbs where these things work better.

If certain regions are able to better provide electricity, along with other services and infrastructure, those regions’ economies and housing markets may receive a boost, relatively speaking, from “semigrations” in their direction, thus outperforming the ones with more troubled supply of such services and infrastructure.

5 Increasingly, homes with good alternative power sources may achieve better values than those without.

Loos is an FNB Property strategist