Recent reports from estate agents and mortgage originators predicting a property upturn have been too numerous to count. However, Ian Wason, the CEO of independent mortgage broker BondBusters believes this is wishful thinking…

There are four main pillars which support the number of property transactions; these are interest rates, property prices, consumer affordability and credit availability.

Interest rates have fallen substantially since their peak in December 2008. However, they remain very high compared to other countries. Due to the huge increase in property prices over the last seven years, the ratio between the cost of buying and the cost of renting is completely out of line particularly in areas like Cape Town where homeowners can pay up to four times the amount to live in their own home than renting the property next door (based on a 100 percent bond) — and this is not including the additional costs of property ownership like rates, insurance and maintenance.

Buying property an emotional decision

When property prices are not rising this makes purchasing property on 'Return on Investment' a very poor financial decision. As many of us know, purchasing a property in South Africa is largely an emotional decision; we buy property because we want the feeling of owning our own home. To correct this, either property prices or interest rates need to fall and rents need to rise — or a combination of these as is happening at the moment.

Property prices have fallen in real and absolute terms in the last year. The real question is where will they go from here? A recent report from the Auction Alliance CEO states that property prices may have fallen by up to 30 percent. If you have been to an auction recently you will know he is not far from the truth. This is largely due to too many 'distressed properties' being forced on the market and a lack of consumer confidence in a future capital gain. After all, why would you buy a property now if you think you can buy it cheaper in a year's time especially if the bond costs you more to service than the rent?

Consumer affordability is helped dramatically by a fall in interest rates (and should be helped by wage inflation, although this seems to be going into reverse) and should have increased the number of potential buyers if it weren't for the fact that the average South African consumer is hugely indebted. According to the National Credit Regulator (NCR) the number of consumers more than three months in arrears is nearly 42 percent of credit active consumers — a whopping 7.3-million consumers! The National Credit Act (NCA) has been fantastic in slowing the flow of 'easy credit' since 2007. However, much of the damage was done before this date. In addition to this a large amount of credit has still been granted since the June 2007 which shouldn't have. This is not due to banks intentionally lending recklessly, but because of consumers embellishing their 'affordability' declarations and banks not asking consumers enough questions regarding their finances. The upshot of this is that consumers have a huge amount of debt to pay off first before they start considering buying property and this is not even considering the 8000 consumers a month that are being put under debt review and effectively taken out of the credit industry for the foreseeable future.

The real blow comes from the credit providers

The above mentioned would be detrimental enough to the property industry, but the real blow comes from the credit providers themselves. Credit providers 'over-lending' in the last four years has meant that an internal South African sub-prime (or even prime) crisis has been created. Lenders, battling the wave of arrears and defaults, have therefore dramatically tightened their credit criteria in the last six months. This has reduced mortgage approvals to a trickle, with one bank reportedly chucking applications straight in the bin. Lenders have increased deposits required for property to up to 20 and 30 percent (or on many occasions a blanket 'no') if the client does not bank with that lender. They have reduced the discounts available on the prime rate and have been calculating affordability based on prime plus two percent (as opposed to prime less one percent) thus negating any of the positive impact on affordability from declining interest rates, causing rumours of liquidity issues. I am not sure this is necessarily true, but it seems that lenders have discovered home loans are just not that profitable. So, why should they lend? The consequence of this is that consumers have gone from being able to get 108 percent bonds to only being able to get 80 percent bonds. They have to therefore save up (not a common phrase in the last few years) a whopping 28 percent cash pile before they can go looking for property. This will take years and may never happen at all.

In normal lending markets this spare capacity would have been mopped up by smaller, more innovative lenders, but due to all of these lenders being reliant on securitised lending it has frustratingly counted them out for the foreseeable future.

It is not what estate agents or mortgage originators want you to hear or believe, but things will be getting worse before they get better. We are still a fair way from the bottom of the cycle.

www.justmoney.co.za

www.bondbusters.co.za

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