First home a step too far for many

Gareth Stokes, FAnews Online Editor

South Africa’s prime lending rate is the lowest it’s been for many years, but it doesn’t mean getting your foot on the housing ladder will be any easier. Even though banks have relaxed their lending criteria in recent months, their conditions remain far s

Lending criteria aside, local banks have to adhere to strict regulations set out in the National Credit Act (NCA). The majority of domestic banks now consider net disposable income rather than gross income to determine mortgage repayment affordability. When assessing your ability to repay the mortgage they deduct from your gross salary all statutory expenses (such as income tax obligations) and general household expenses (including school fees, food, transport, insurance and investments etc) to reach an amount that can be applied to servicing the mortgage. Banks expect first time home buyers to have sizeable deposits (between 10% and 20% of the purchase price) at a time when real disposable income is in decline, jobs remain scarce and house prices are rebounding strongly.

House price inflation spiral

The latest Absa house price index confirms a 15.2% spike in the average nominal value of small, medium and large houses year-on-year to May 2010. Absa compiles the index from internal approved mortgage statistics. House price growth was most significant in the small house (80m² to 140m²) category, with the average nominal value of such homes up 29.2% y/y in May 2010, after rising 24.4% y/y in April. The average small home buyer is forking out R843 700 for a house. According to Jacques du Toit, Senior Property Analyst at Absa Home Loans, the average house in the middle segment (houses between 141m² and 220m²) now exceeds R1 million (at R1 081 400).

These statistics point to a definite trend in favour of smaller and more affordable houses. After a marked improvement in the affordability of housing over the past two years, on the back of house price and interest rate trends, housing affordability appears to have turned around in late 2009,” observes Du Toit. But the upward trend could be running out of steam. Since Q4 2009 mortgage repayments expressed as a percentage on household disposable income have been on the rise. Rising property rates and taxes and the continued surge in electricity and water tariffs is also impacting the overall cost of property ownership.

Given these trends we wondered whether the recent house price growth was sustainable. Is the 15% plus growth an accurate reflection of consumer sentiment given the difficult economic circumstances they face? “Base effects have contributed to these growth trends as house prices were declining on a year-on-year basis in all three categories of housing 12 months ago,” writes Du Toit. In other words the seemingly ‘steep’ house price growth is in part due to the dire housing market conditions of a year ago.

Stretching your paycheque

Let’s consider an example of a first time buyer purchasing a R1 million home. Assuming a 10% deposit and a mortgage interest rate of prime (currently 10%) your monthly repayment – excluding life insurance and home insurance costs – will total R8 685. And you’ll have to have plenty of cash set aside to complete the transaction. Apart from the R100 000 deposit you will have to cover the various costs associated with the transaction, including transfer fees of R37 085, bond costs of R8 665 and an initiation fee of R4 100!

After struggling to meet banks’ rigorous lending criteria, potential home owners are also battling to save up enough to cover deposits and transaction costs. Household disposable income rose a mere 2.7% in Q4 2009 – while nominal house prices jumped 4.4%. House price inflation is outstripping growth in disposable income by a significant margin, impacting on households’ ability to save and service debt.

Macroeconomics not playing ball

The Reserve Bank has little room to manoeuvre where interest rates are concerned. Inflation dropped into the 3% to 6% target range in April 2010, but looks likely to remain at the top of the range due to double-digit wage and administered price increases. You can expect the 10% prime interest rate to remain unchanged until at least the first half of 2011, after which a rising interest rate cycle will resume.

House prices should continue their upward march, but at a slower pace. Du Toit notes: “After bottoming around mid-2009, house prices have picked up markedly on the back of the economic recovery, low interest rates and banks’ selective relaxation of lending criteria in respect of mortgage finance.” But year-on-year house price growth may taper off somewhat in the second half of the year.

Editor’s thoughts: House prices accelerated during the country’s property boom, beginning early 2000 and continuing to mid-2007. Since then home owners, real estate agents and property developers have struggled as housing transaction volumes dropped through the floor. And volumes remain low despite signs of renewed house price inflation. Do you think current house prices are realistic given the economic challenges that in a post-recession South Africa? Add your comments below, or send them to gareth@fanews.co.za