In the hous­ing mar­ket’s best in­ter­est?

Finweek English Edition - - INSIDE - BY GLENDA WIL­LIAMS

In­creases in the num­ber of home loan ap­pli­ca­tions, and in the value of the ap­pli­ca­tions, in­di­cated a hous­ing mar­ket on the mend. But the re­cent 25-ba­sis points in­ter­est rate in­crease – which trans­lates to a min­i­mum of an ad­di­tional R16 for ev­ery R100 000 bor­rowed – on the back of a 50-ba­sis points hike in Jan­uary, will do l it­tle to in­stil eco­nomic and in­vestor conf idence or benef it al­ready cash­strapped con­sumers.

“For con­sumers, their monthly bond re­pay­ment is the sin­gle largest ex­pense. A home­owner (or prospec­tive buyer) with a bond of around R890 000 over a 20-year re­pay­ment pe­riod would have had to al­low for an ad­di­tional R284 per month fol­low­ing the Jan­uary rate hike. Add to this the knock-on ef­fect on other credit com­mit­ments and dayto-day liv­ing costs. Now, they will need to f ind an ad­di­tional R177 per month (al­most R500 ex­tra since the start of the year) just to meet their ba­sic home loan com­mit­ments. It is dif­fi­cult to see how con­sumers can re­duce their over­all debt lev­els, let alone save for a house de­posit, says Se­eff chair­man Sa­muel Se­eff.

THE VALUE OF A DE­POSIT

With the monthly house­hold in­come re­quire­ment for new buy­ers in­creased by about R500 and dif­fi­cult eco­nomic con­di­tions con­tin­u­ing to erode dis­pos­able in­comes, the like­li­hood of own­ing a home be­comes f ur­ther out of reach for those aim­ing to get onto the prop­erty lad­der. In this en­vi­ron­ment, the draw­card of the 100% home loan where con­sumers elect not to put down a de­posit can prove en­tic­ing for young buy­ers and f irst-time buy­ers.

But, given the lat­est hikes, banks are l ikely to tighten loan cri­te­ria to en­sure that bor­row­ers do not be­come over-in­debted.

“The per­cent­age of loans be­ing granted for the full pur­chase price has ac­tu­ally fallen to 39% from 41% two years ago and is still trend­ing down­wards,” says Shaun Rade­meyer, CEO of Bet­terBond Home Loans.

“This is no doubt a re­ac­tion on the part of lenders to the re­cent con­tract ion i n t he econ­omy and grow­ing em­ploy­ment un­cer­tainty on the part of con­sumers – and it un­der­lines the fact that it is al­ways prefer­able for home buy­ers to pay a de­posit if they pos­si­bly can,” he says.

If some­one with a new 100% home l oan were s ud­denly to lose their job, for ex­am­ple, and had to sell their home in a hurry, there would be sell­ing costs and agent’s com­mis­sion to pay as well as the 100% loan to re­pay, so they could quite eas­ily end up ow­ing more than the sale price of their prop­erty.

“The buyer who paid a 10% or 20% de­posit would ob­vi­ously be able to cope much bet­ter in this sit­u­a­tion – and it is worth not­ing that those who put down a de­posit are also typ­i­cally granted their loans at a lower rate of in­ter­est, which makes it eas­ier for them to keep up with monthly re­pay­ments when times are tough.”

In ad­di­tion, Rade­meyer notes, those who save up a de­posit be­fore buy­ing will save a sig­nif icant amount on the to­tal cost of their home over the loan pe­riod.

“For ex­am­ple, a R650 000 home bought with a 100% loan at 10.25% (prime plus 1%) would cost a to­tal of more than R1.53m over 20 years. The same home bought with a de­posit of R65 000 and a 90% loan would cost a to­tal of about R1.38m.

“That is a sav­ing of more than R150 000 – a pretty good re­turn on the R65 000 that the home­owner ‘ in­vested’ as a de­posit. And it is l ikely to be even bet­ter if the buyer is able to se­cure a bet­ter in­ter­est rate by

“THE PER­CENT­AGE OF LOANS BE­ING GRANTED FOR THE FULL PUR­CHASE PRICE HAS AC­TU­ALLY FALLEN TO 39% FROM 41% TWO YEARS AGO, AND IS STILL TREND­ING DOWN­WARDS.”

pay­ing that de­posit,” says Rade­meyer.

Sound ad­vice given that econ­o­mists ex­pect another 25-ba­sis points in­crease in the fourth quar­ter of this year as well as a prob­a­ble 1% hike in 2015.

In­evitable rate hikes also ac­cen­tu­ate the im­por­tance of al­low­ing for in­creased pay­ments when pur­chas­ing a home. Over-com­mit­ment by home­own­ers is a wor­ri­some trend, ref lected in FNB’s

Es­tate Agent Sur­vey for the sec­ond quar­ter of 2014, which showed an es­ti­mated 14% of home sell­ers be­lieved to be sell­ing in order to down­scale due to fi­nan­cial pres­sure.

RENTAL PROP­ER­TIES

Con­sumers who are rent­ing may also soon be feel­ing the pinch if land­lords hike their rentals come re­newal time in an at­tempt to keep up with in­creased bond re­pay­ments and ser­vice costs. And that could af­fect around 2.5m-3m South African house­holds that rent their pri­mary ac­com­mo­da­tion.

Trafal­gar Prop­erty Group’s MD An­drew Schae­fer told Fin­week that rental in­creases have trended below t he 10% norms achieved i n prior years. That, how­ever, is un­likely to be much of a con­so­la­tion to al­ready f inan­cially dis­tressed con­sumers. But rental ad­just­ments, says Schae­fer, are typ­i­cally made with lease re­newals and se­quenced with lease ex­piries so it is un­likely that many in­creases would have been trig­gered specif­i­cally as a re­sult of this lat­est in­ter­est rate hike.

Like­wise, the ef­fects on yields for land­lords would also be small given the quan­tum of the in­crease, says Schae­fer. As­sum­ing a bond of R600 000, the 0.25% rise will in­crease bond re­pay­ments by less than R100 per month.

“But, what could make a sig­nif­i­cant im­pact on net monthly rental in­come is the abil­ity to ef­fec­tively re­cover mu­nic­i­pal ser­vices {aim­ing to achieve 100% re­cov­er­ies} and man­age main­te­nance costs ef­fec­tively,” says Schae­fer. “Care­fully fore­cast­ing monthly cash f lows for in­vest­ment prop­er­ties re­mains a crit­i­cal suc­cess fac­tor, es­pe­cially as the in­ter­est rate cy­cle is ex­pected to con­tinue ris­ing,” he adds.

Sa­muel Se­eff

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