It could have been worse
We recently spent some time in an estate agents office and must confess the mood was rather sombre. They’re simply not earning the commissions they’ve become accustomed to. Their predicament is not for lack of trying – nor is it due to a shortage of listed property. At the moment, most agencies have more properties on their books than ever before. There simply aren’t enough buyers!
The few brave individuals who make it to the ‘offer to purchase’ stage have two more hurdles to clear. First, they have to battle the banks. South Africa’s big four mortgage institutions have significantly tightened their lending policies in recent months. There are many reasons for this; but concerns over negative equity in a falling market feature prominently. Negative equity occurs when your house is worth less than the outstanding amount on your bond. That’s why banks are thinking twice before issuing 100% bonds on properties valued at more than R800 000.
Half of new bond applications are denied
Evidence from various stakeholders suggests a significant shift in bank’s willingness to grant home loans. Mortgage originator ooba revealed that 50.1% of all bond applications were rejected by banks in June 2008. This is markedly higher than the 40.3% figure from the previous month. The company tried to put on a brave face. “Our stats show that more than a third of all the home loan applications declined by one bank in June 2008 are approved by the other banks it sends the application to,” said ooba’s chief executive, Saul Geffen.
But those approvals may amount to nothing if we consider that many banks are now demanding between 10% and 20% deposits. Our guess is this will make it near impossible for many buyers to take up the loan. After paying the transfer duties on a home of R1 million you’re hardly going to have another R100 000 lying around to cover the deposit. If anything the deposit condition will result in more unsold houses. Most offers to purchase are conditional on the purchaser obtaining a 100% bond!
It could have been worse
Second, they have to survive the National Credit Act... It’s slowly dawning on us that the National Credit Act was introduced just in time. We might want to blame it for part of the decline in house prices and sales; but shouldn’t lose sight of the crisis it prevented. Jose de Abreu, a senior partner at De Abreu and Cohen Attorneys, says the NCA was perfectly timed. Because the Act was implemented in the middle of a rising interest rate cycle it “has proven a saving grace for many by forcibly protecting them from sinking into further debt.”
Re/Max’s marketing and finance director, Jeanne van Jaarsveldt, agrees. “Now, one year after the introduction of the NCA, consumers, despite external economic factors, can take some comfort that financial institutions are looking out for their best interest in terms of affordability and long-term ability to service their debt commitments.” We might not like having these decisions taken from our hands; but it’s clear that in most cases the ‘regulated’ decision makes more sense.
Many buyers who purchased property before the NCA came into effect have overextended themselves. This has led to a soaring number of repossessions as consumers struggle to service their debt. And an increasing number of these repossessions involve houses with negative equity. In other words – before costs are even considered – banks are getting back less than the outstanding balance on the mortgage when they sell the repossessed property.
Editor’s thoughts:
There’s nothing like an economic slowdown to shake the rust from a financial system. Poor lending practices are exposed – and those who have overextended soon fall by the wayside. The National Credit Act was implemented too late to protect consumers in the current downturn; but should go a long way to helping in the future. Should first time home buyers be ‘forced’ to make a down payment when purchasing? Add your comment below, or send to [email protected]
Comments