Bank credit squeeze to create new culture
NOW THAT the credit crunch has closed the taps on the post-1994 national borrowing binge, South Africans are set to retur n once again to a culture of saving – a process that will add significant strength and substance to the wealth-building role of home ownership, says Ronald Ennik, managing director of the Gauteng division of Pam Golding Properties.
“At the bonded end of the residential property market, the process is being driven by the banks’ tightfisted mortgage lending policies – they now generally require home buyers to put on the table deposits of as much as 30 percent – and by the dampening effects on household budgets of the tight restraints imposed by the National Credit Act (NCA).
“Although the reticence of banks to advance mortgage finance may well be bitter medicine for aspirant home owners right now, and in the immediate future, it heralds the return to the days when a house was a true store of value to its owner,” says Ennik.
“Put another way, the days of 100 percent mortgages are all but gone and this is the beginning of a process that will take the ‘smoke and mirrors’ out of home ownership and return it to the (normal) situation where people who buy homes can actually afford them.
“As equity-based home ownership takes hold, it will foster a far more widespread culture of saving in South Africa – not least among the country’s younger generation, who have grown up in a consumption-driven climate of neck-high debt… blissfully unaware of the virtues and the necessity of saving.
“Also, by having meaningful equity in their properties, home owners will be motivated to act more responsibly by taking proper care of their homes and by not defaulting on bond repayments. By doing so, they will avoid the prospect of losing their hard-saved deposits, on the turn, in a forced sale or auction that would otherwise be inevitable.
“This contrasts sharply with the past when, if there was no financial ‘uphill’ in acquiring a house, there was certainly no ‘downhill’ in losing it,” says Ennik.
“The enforced process of putting more equity into home bonds will ripple into other areas of wealth creation and money management – engendering a more saving-focused, debt-averse national mindset and promoting better, more disciplined control of household purse strings.
“There is no question that intensification of saving is absolutely essential if South Africa is to achieve sustainable economic growth in future. The strong, deeprooted savings culture of countries in the east sets a good example for us to follow. For instance, the total savings-to-GDP ratio in India is almost 30 percent and in China it nudges a whopping 50 percent – whereas in South Africa it is a paltry 15 percent.
“Another sobering thought is that South Africa’s household debt ratio (the proportion of household income spent on paying off debt) is running close to 80 percent, whereas household savings as a percentage of our GDP is virtually zero.
“Against this background, it is essential that good money management – with the emphasis on saving – should be imbued in the youth of South Africa at school level, as it is in many other countries. The work the South African Savings Institute is already doing on this front is to be roundly lauded,” Ennik says.
Launched in 2001, and sponsored by the state-owned Industrial Development Corporation, the SA Savings Institute is a non-profit organisation dedicated to developing a robust culture of saving.