While metro former townships are the most affordable for those looking to purchase their first house, there remain certain barriers to entry. How can first-time buyers start out in the property market – and where do these metros fit into the picture?
When buying a first property, much depends on the deposit saved by potential new homeowners, how much they earn and, of course, where they decide to buy their first home. According to the FNB Major Metro Former Townships House Price Index Q2 2016 Property Barometer (July 2016), the previous township areas in South Africa’s six biggest metros – eThekwini, Cape Town, Nelson Mandela Bay, Ekurhuleni, Joburg and Tshwane – are still the most affordable areas in which to buy property. This is despite the fact that house prices in these areas are currently increasing at least twice as fast as those in the suburbs (see the FNB Property Barometer graph below).
As the first table on monthly income required by first-time buyers shows, the current average price in these areas is R359,980. The average household income required to qualify for a home loan here would be just less than R12,000 a month. This is assuming that the buyer was approved for a 100% loan through one of the special bank lending programmes for first-time buyers or was able to access a FLISP subsidy from the National Housing Finance Corporation (see nhfc.co.za).
These figures correlate reasonably well to those given for affordable housing in the latest Absa Housing Review, which defines this type of property as “homes of 40m² to 79m² and priced up to R600,000 in 2016.” The monthly income required to qualify for a 100% loan in this category would be just under R14,000.
*Deposit estimates = 10% of purchase price except for aff ordable and township homes
**Assuming a 20-year bond at interest rate of 10.5% and bond repayment max allowed = 30% of monthly gross
*Assuming a 20-year bond at interest rate of 10.5%, deposit of 10% and bond repayment max allowed = 30% of monthly gross
THE SUBURBAN APPEAL
As FNB household and property sector strategist John Loos has pointed out, buying a home in a township usually means a long and often costly daily commute to work. This significant compromise means that, for the foreseeable future, these areas are probably destined to remain less favoured among first-time buyers.
In other words, he says large numbers of upwardly mobile buyers from the townships are happy to trade off a higher home price (and monthly repayment) in the suburbs against the time and money they will save by living closer to work. Easier access to shops, schools and other amenities are also attractive factors in these areas.
It usually means, though, that they will need to save a deposit of at least 10%. Even then they will be facing a substantial jump in monthly income to be approved for the required home loan.
HOW MUCH IS ENOUGH?
Using Absa’s small homes (properties of 80m2 to 140m2 in size) as a proxy for those that first-time buyers are likely to target in the suburbs or, increasingly, in South Africa’s regenerated inner-city precincts, the second table on the income required by first-time buyers by region (see opening spread) shows that even in Nelson Mandela Bay – currently the metro with the lowest home prices – the monthly household income required would be almost R20,000.
Meanwhile in Cape Town, the metro with the highest home prices, first-time buyers currently need to earn almost twice that amount – or close to R40,000 a month – to get into the suburban market.
This no doubt accounts for the fact that first-time buyers make for a much lower percentage of total home sales in Cape Town than in other cities and regions, where the average income required to buy a first home generally falls somewhere between R20,000 and R30,000 a month.
Higher prices mean that buyers require bigger home loans – and bigger incomes to qualify for those home loans. Lenders generally require that the monthly home loan repayment does not exceed 30% of the buyer’s gross monthly income – the figure used to calculate the estimated income required in different areas. For cities where figures for the percentage of first-time buyers are available (courtesy of First National Bank), there is a clear correlation with the average purchase price and the estimated average income required to qualify for the necessary bond.
However, the repayment-to-income ratio is only a guide: other factors can affect a buyer’s ability to qualify for a home loan and thus to purchase property. These include the amount of existing debt when applying for a home loan as well as credit history (see comments by Amanda Cuba, chief operating officer at RE/MAX of Southern Africa). Both of these can – and usually do – affect the lender’s decision to approve a home loan application and interest rate charged.
A slight change in that rate can make a big difference to affordability. To buy a small home in Johannesburg, for instance, the first-time buyer who is regarded as high risk (and can only obtain a loan at two percentage points above the prime rate of 10.5%) would need to earn almost R4,000 more a month to qualify. On the other hand, the buyer who the banks regard as low risk and who is able to save for a higher deposit could be approved for a loan at prime.
TOO MUCH DEBT, TOO LITTLE SAVINGS
A lack of income is often not the biggest problem facing prospective homebuyers at the lower end of the market, says Amanda Cuba, chief operating officer at RE/MAX of Southern Africa.
Says Cuba: “Many people see homeownership as a milestone they would like to achieve and believe they are earning big enough salaries to do so. But we have found that agents working in the affordable sector often have to sell the same property five times to find a buyer who can actually qualify for a home loan because of the problems with debt and damaged credit histories in this market.
“Consumers often get caught in a debt trap early in their careers, which has a negative impact on their ability to buy their first property. There needs to be a change of mindset, with consumers first learning how to prepare themselves for home ownership by paying off as much of their debt as possible, cleaning up any black marks on their credit records and building up their savings.
“South Africa has one of the worst savings rates in the world and I believe it’s because we don’t do nearly enough to provide youth and new entrants to the job market with proper financial education. Teaching first-time buyers to save early and build a clean credit record would be a major step forward in furthering home ownership. Estate agents can help with this – as well as assist potential buyers to access FLISP and HiP subsidies.”
Words Meg Wilson