More pain in store for homeowners...
A few years ago the champagne corks flew every time the bank approved a 100% mortgage. Nowadays there’s less excitement. Yes, a bond remains a popular way to leverage your financial position and secure assets well in excess of your means… But it’s just not as much fun incurring massive monthly interest charges when the value of your property is plummeting! The latest statistics provided by home loan originator ooba point to a year-on-year decline in the average house purchase price of 6.5%, from R881,044 to just R823,483!
According to Saul Geffen, CEO of ooba, the April number represents a normal pull back after the strong growth experienced in the first half of 2010. “We anticipate the negative growth trend will reverse shortly after mid-year and show moderate positive price growth for the second half of the year,” he says. His prediction might pan out, though the moderate positive price growth he refers to will probably be less than inflation, resulting in negative real growth from real estate. It seems instead of things improving as South Africa Inc chugs out of recession, they’re getting worse!
Banks are coming to the party, but...
What’s to blame for the lacklustre performance from residential real estate? It started with the sub-prime crisis which exhibited in the United States toward December 2007 and soon spilled over to the global financial system. Banks – South African banks included – suddenly became extremely sensitive about lending money. Locally the National Credit Act (NCA) further reduced the amount of funding available to private individuals to invest in or purchase houses. Remember, much of the last property boom was characterised by buy-to-let, buy-to-fix and off-plan speculators that acquired multiple bonds without a hope of servicing them from their existing income levels.
And as liquidity drained from the market homeowners suddenly found there weren’t any buyers, regardless of the price. Through 2008/9 desperate sellers were forced to wait for longer and accept far less than their asking price… We’ve heard these reasons before, but nobody expected the sector to remain in the doldrums for quite this long. We somehow convinced ourselves the seven to 12-year cycle exhibiting in global housing markets didn’t apply to us. Truth is the current slump could continue for another three or more years!
Property remains in a slump despite the country’s main banks further relaxing their lending criteria. Ooba says the average deposit size as a percentage of the purchase price has decreased significantly year-on-year April, down from 39.6% to just 13.1%. So – instead of finding R396,000 for a deposit on your R1 million house purchase you only have to find R131,000 today. This, plus the fact many banks have re-instated their 100% home loan offers, makes it easier for first-time buyer to enter the market.
Bigger bond equals bigger bond repayment!
Banks are still declining a number of home loan applications, but the 45.4% initial decline ratio is softer than before – and the effective approval ratio has increased significantly from 57.3% in April 2010 to 64.4%. “The ability to obtain financing is one of the biggest drivers in the property market, so the consistent improvements are positive for the market,” notes Geffen. Unfortunately the positives are quickly offset by ‘fresh’ negatives.
One of the major concerns for the real estate industry is that South Africa’s interest rate cycle is at a lower turning point. Inflationary pressures are mounting and the economists agree the Reserve Bank will have to act to hike interest rates, soon. The consensus is for a 50 basis point increase before year-end, though there are some analysts who expect the hike to be delayed until Q1 2012.
An interest rate hike will be bad news for recent homebuyers because the average size of approved bonds is on the increase. Approved bonds averaged R715,319 in April 2011 versus R 689,742 in the comparable period last year. Relaxed deposit requirements allow homebuyers to extend themselves slightly more – a decision they may regret should interest rates spiral upwards sooner or more aggressively than expected.
Editor’s thoughts: Ready or not, here it comes… Don’t say you weren’t warned. If anything in the uncertain world of economics could be cast in stone it’s this: Interest rates are going up late 2011 or early 2012! Are you ready for an increase in your monthly bond repayment – or are you still trying to find the cash for this year’s electricity hike? Please add your comment below, or send it to gareth@fanews.co.za
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