What you and your clients need to know about home loan approvals in 2016?
It’s no longer a moot point whether or not house prices will be negatively affected by the current economic malaise in South Africa. The consensus, albeit a reluctant one for some, is that weak economic growth, coupled with accelerating inflation, will inevitably result in a correction in real house prices this year, and possibly beyond.
Absa is the latest to join the chorus, with property analyst Jacques du Toit forecasting nominal house price growth of about 5% in 2016. Given that the Reserve Bank was already forecasting an average inflation rate for 2016 of 6.1% as far back as July last year – long before the rand’s dramatic crash in January 2016 – it’s fair to expect that house prices will suffer a decline in real terms (once inflation is factored in) during the course of the year.
Says John Loos, FNB’s respected property economist: “The housing market cannot defy economic gravity forever. We’ve reached a point where the long-term property super-cycle is due for a correction that could last a number of years.”
INCREASING INTEREST RATES
With interest rates already expected to rise further, beyond the 50-basis-point increase on January 28, Loos says consumers will find it harder to qualify for home loans as banks tighten their lending criteria and increase their scrutiny on consumer affordability. This is especially so when one considers that more than half of South Africa’s 19-million credit-active consumers have impaired credit records.
“If you look at the last two rate-hiking cycles, you see cumulative increases of around four to five percentage points,” says Loos. “Consumers need to factor in rate hikes of that magnitude when they assess their long-term home loan affordability. If South Africa suffers a credit rating downgrade, then the hiking cycle could be even more severe.”
Erwin Rode of Rode & Associates says it’s a foregone conclusion that interest rates will continue to rise, the only question being how fast and by how much. He also cautions that the prospect of higher interest rates will result in fewer home loans being approved.
However he highlights another unwelcome reality for home buyers to consider – negative equity. This refers to a situation where a buyer agrees to a particular purchase price with a seller, only to see an economic downturn send the market value of the home below the purchase price. Rode says in an environment of heightened risk aversion, banks may well factor such scenarios into their decision-making before granting home loans.
BANKS LESS KEEN ON LENDING
“The bleak economic picture means banks are going to find it more difficult to discover value in a property when confronted with a mortgage application,” says Rode. “Fewer mortgage applications will be approved in the year ahead and that will impact negatively on prices.”
Says Shaun Rademeyer, CEO of BetterLife Home Loans: “In the current economic climate, SA banks will face higher capital-reserve requirements. They will therefore want to ensure that they take on quality business and will no doubt become more particular when assessing new credit and loan applications.”
FINDING THE POSITIVES
While it’s difficult to find positives in this scenario, Rode points out that nominal house prices (before being adjusted for the effects of inflation) have declined only three times in the past 49 years. Absa’s House Price Index, which began in 1966, indicates that those declines were -7.69% in 1985, -3.97% in 1986 and -0.36% in 2009. The remaining 46 years all experienced positive nominal house price growth.
“It would take a pretty hefty economic catastrophe for nominal house prices to decline,” says Rode.
But don’t get mislead by this small bubble of optimism. Loos cautions that because house price indices are based on actual transactions, they don’t factor in the true extent of the declines that residential property markets can suffer in a recessionary economic environment.
“Extremely weak property markets such as less glamorous suburbs or dodgy CBD areas will entirely exit the index, because in a recessionary environment there will be no transactions in those areas,” says Loos. “So consumers shouldn’t be lulled into a false sense of security by the overall house price index. Properties in specific areas can still easily experience nominal house price decline. And when things are so bad that one cannot sell in particular areas, it won’t even be captured in the overall index, which gives a skewed picture of what’s really going on.”
WHAT THIS MEANS FOR YOUR CLIENTS
For home loan applicants, this means being even more aware of the old property investment adage of “location, location, location” when purchasing. In a weak economic environment a bank will be more reluctant to grant a loan to purchase a home in a poor area, since it would have little prospect of selling that property to recover costs in the event of a borrower defaulting.
Ooba CEO Rhys Dyer says banks’ reluctance to approve loans will also be impacted by the fact that South Africa’s home-loans market is still overwhelmingly driven by first-time buyers. No less than 54% of Ooba applications are currently from first-time homebuyers, of which just more than half are for loans equal to 100% of the property’s value.
Dyer says Ooba approves only 37% of home loan applications for mortgages with a 100% loan-to-value ratio. Across the board Ooba’s overall rate of approval for home loans has dropped from 76% in the first quarter of 2015 to 72% at present. Dyer says current approval rates are only sitting at 55% across all banks in South Africa.
“This is driven almost exclusively by a greater percentage of affordability declines, where consumers sign an offer to purchase on a property that they simply cannot afford,” says Dyer. “We have already started to see the impact of interest rate increases as well as general increases in the cost of living.”
Shaun Rademeyer, BetterLife Home Loans CEO, has this advice for clients:
1. Do a proper income and expenditure budget, so that you are fully aware of the state of your personal finances.
2. Get pre-approval from a reputable mortgage provider, which will also help establish what type of deposit you will need to put down.
3. Once you know what you can afford, try to establish whether houses in that price range meet your desires and requirements.
4. If the property you are considering is out of your price range, carefully re-evaluate your monthly expenses to assess where you may be able to save extra to afford a bigger home loan. If not, play it safe in a realistic price bracket.
Timothy Akinnusi, Nedbank’s head of home loan sales and client value management, suggests this buyer’s checklist:
• Check your rating online. It’s free.
• Home ownership is more expensive than renting, so you will have to adjust your budget.
• Pay up all store accounts. Only pay cash and buy when there is a sale.
• Don’t take on any new debt.
• Trim your expenditure wherever possible, even if it means downsizing your car.
• Save a little every month so that you won’t get into financial difficulty if interest rates increase.
• Maintain your home properly. “Saving” on maintenance now will cost you a lot in the long run.
Words: Garth Theunissen
