The affordability reality
“Understanding how affordability affects the consumer during the pre-buying and property searching phases is half the battle between success and a declined loan”
Affordability remains the foremost consideration for anyone contemplating buying a home in South Africa. This was the key finding of the Homeowner Insights report, a partnership between Absa bank and Columinate, a digital market research company. The focus of the research was the impact of affordability on consumer behaviour during the two initial stages of buying a home, namely the pre-buying and property searching phases. During these phases, prospective buyers not only have to consider the sheer size of the transaction and the duration of the commitment but also the associated risks and their ability to service the home loan consistently over a long period of time. The Homeowner Insights study found that 87% of respondents were confident of their ability to afford their newly approved home loan at the time of searching for a property. However, in Absa’s experience, only 38% of applicants are granted home loans following the bank’s assessment process.
The biggest challenge
Despite its importance, the concept of affordability is often poorly understood. Says Carel Grönum, managing executive of Absa Home Loans: “Since the introduction of the National Credit Act (NCA), banks and other lenders have had to sharpen their credit approval process to ensure affordability. The act requires an understanding of a customer’s income and adds a detailed analysis of other credit commitments and living expenses.” The greatest test with the affordability assessment does not lie with the assessment process, but rather with the customer’s interpretation and understanding of their own personal financial situation. Says Grönum: “There are instances where customers purposefully fail to disclose all their financial commitments to the bank in order to secure a higher home loan.” Neglecting to divulge minor expenses such as a gym contract or television subscription could significantly change the affordability position of an applicant. Similarly, store cards, cellphone contracts and other recurring commitments that may seem insignificant to the buyer often result in the request for finance being turned down. Says Grönum: “If a home loan is assessed and granted based on nondisclosed information, customers could soon find themselves in a challenging financial position. Where customers have intentionally withheld information relating to their income and expenses, they will struggle to find protection under the NCA.”
Behind the declines
While credit records and conduct of accounts play a key role when assessing home loan applications, affordability accounts for 22% of customers’ home loan applications being declined. In cases where applicants have healthy credit records and good financial conduct, some simply cannot afford the monthly instalment based on the bank’s affordability assessment. A further 35% are credit declines. Clearly, there is much more to assessing affordability than is understood by many consumers. More than a third of Homeowner Insights respondents said they had to reassess their needs once they started identifying suburbs and viewing properties they liked, with 37% citing affordability as the main reason.
The impact on growth
In ooba’s 2016 Q2 oobarometer round-up of South Africa’s property landscape, CEO Rhys Dyer commented on affordability: “Slowing economic growth, increasing unemployment, escalating inflationary pressure and higher interest rates continue to erode consumer affordability. Consumer confidence is at its lowest level in years. With property price growth below consumer price inflation, we expect zero to negative property price growth in real terms for a while to come.” Consumer pressure was confirmed by lower bond approval rates, down by 4.5% year on year from Q2 2015. Lower approval rates indicate increased housing and mortgage finance affordability pressure on home buyers, along with the escalating costs of lending. Says Dyer: “The year-on-year increase of 16 basis points in the average interest rate in Q2 2016 illustrates the increased cost of credit. Providing a sizeable deposit can make the banks look more favourably at a buyer’s home loan application because it reduces the risk to the bank. Banks are also more likely to be negotiable on the interest rate, because they are taking a lower risk with a deposit.”
“Lower approval rates indicate increased housing and mortgage finance affordability pressure on home buyers, along with the escalating costs of lending”
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