Municipal electricity costs raise cost of living

Municipal electricity tariffs have increased by a massive 86.5 percent since the beginning of 2008 and contributed to the deterioration in the affordability of home running costs, according to First National Bank (FNB).

John Loos, a household and property strategist at FNB, said the electricity affordability component was "the most troublesome part" of the municipal rates and tariffs bill.

Loos said more upward pressure in this component was expected because Eskom continued to annually press for more above inflation hikes as electricity demand declined.

The municipal rates and tariffs/per capita disposable income index had deteriorated by 31.8 percent from the start of 2008 until the first quarter of this year, with major upward pressure exerted by high electricity tariff inflation.

Loos said the water and nonelectricity tariff/per capita disposable income index had deteriorated by a more moderate 13.2 percent from 2008 until this year, while the home maintenance and repairs/per capita disposable income index had actually declined or improved by 9.1 percent over this period.

The consumer price index (CPI) for electricity and other fuels increased year on year by 11.24 percent in January, while the CPI for water and other services, including assessment rates, was not far behind at 9.81 percent, he said.

By comparison, the CPI for home maintenance and repairs had recently entered deflationary territory to the tune of minus 0.45 percent, he said.

Loos said this was possibly due to a partial "crowding out" of this sector by municipalities and utilities with their "extreme tax/tariff hikes".

Housing had lost major ground over the boom years on consumer goods and services in terms of relative affordability and never fully recovered.

Loos said this "loss of ground" over time was in part addressed by the longer-term trend towards building smaller sized residential units on smaller sized stands.

But the FNB real house price index, which adjusts house price increases for inflation, was in the first quarter of this year still a massive 61.02 percent higher than in early 2001 and also mildly elevated at 6.2 percent from its end-2011 relative low point, Loos said.

However, average house price inflation had of late come increasingly into line with consumer price inflation and there was a possibility of real house price decline, driven by the lagged effects of rising interest rates and a weak economy.

Loos said house price inflation was "far from strong" and was possibly approaching a time when it battled to outpace per capita disposable income growth or general consumer inflation, which implied limited or no further increase in real house price inflation for a while at least.

However, Loos said FNB did not believe the deterioration in home buying affordability was quite over yet for creditdependent home buyers, as a further 0.5 percentage point increase in interest rates was anticipated by early next year.

In addition, Loos said there was no end in sight yet to municipalities and utilities' drive to raise tariffs at a much faster pace than consumer price or household income inflation.

"There doesn't appear to be any end in sight to the deteriorating affordability trend in this very important area of home running costs," he said.

Business Report