In 2008, high interest rates, the National Credit Act (NCA), the lending policies of commercial banks and a global financial crisis were all held accountable for poor property sales and falling house prices.

Now, a year later, conditions have hardly improved. Property sales remain poor and prices continue to slide. Yet, interest rates have reduced significantly back to 2006 levels and many commentators are saying that the worst of the financial crisis may be behind us.

"This gridlock in the industry can only be attributed to a series of deep-seated misconceptions in the minds of owners, buyers, agents and even some property market commentators," says Jan Kleynhans, CEO of FNB Home Loans.

"Rocketing prices and rapidly expanding demand some three to four years ago have left many people with a deep-seated belief that these conditions will return and they should therefore price to sell and bid to buy accordingly. Sellers — specifically — have difficulty in accepting that the value of their house is falling and are extremely wary of selling in a low market if they believe a recovery is around the corner."

FNB's recent Residential Property Barometer (Q1/2009) surveyed agents who indicated that the percentage of properties sold at less than asking price remains above 80 percent, suggesting that many sellers are still not realistic in their pricing.

FNB's view is that recovery will be slow and that we may see further weakness extending into 2010. It is this scenario that is partially shaping the bank's decision-making when it considers an application for residential mortgage finance.

"Property values need a number of preconditions for growth. The most important of these is underlying economic vitality. And this condition has been lacking for some time, particularly in terms of consumer affordability levels and sluggish income growth or even income contraction. This is exacerbated by lower consumer confidence levels as the average potential property buyer is concerned about losing their job or at best a reduction in income growth. It should come as no surprise, then, that prices continue fall in consecutive surveys reported in the FNB Property Barometer and every other report on the residential property market. Thus one finds an oversupply of properties, typically by those needing to sell and sluggish demand due to low consumer confidence levels," says Kleynhans.

Bank lending policy

"Financing residential property remains an active business. Across the banks, thousands of new mortgages are granted every week. While FNB is not a dominant mortgage-granter and secures about 15 percent of the market, we are slowly increasing our market share and continually seeking new business opportunities despite the lackluster business environment," says Kleynhans.

Recent statements in the media suggesting that banks are actively withholding residential lending to the point that a lack of credit is undermining the market are, however, far from the truth. FNB's decline ratio stands at around 50 percent of all applications and this level has only increased moderately in the past 12 months.

From a credit decision-making viewpoint, FNB looks at the following:

• The NCA requires a comprehensive analysis of the customer's financial position, specifically in terms of home loan affordability at the time of assessing the loan.

• The Act requires that credit-granters are diligent and methodical in their approach to ensure reckless lending does not occur.

• The underlying asset must represent sound value particularly as the risk of customer default is highest in the first few years of the home loan being granted.

• That the underlying value of the property will provide sufficient security for the loan given default. Where the loan value is deemed to be too high, the bank may offer a lower loan aligned to the value of the property or decline the application.

• A property report by a bank assessor.

• A review of sectional title financial statements.

• Buyer equity in the property in the form of a deposit.

For customers in good standing, however, FNB is currently reviewing its earlier requirement of a 10 to 15 percent deposit 'across the board'. While deposits will continue to be a requirement in mortgage finance, lower deposit requirements will aid affordability without either compromising the customer's debt ratio or exposing the bank to potential losses arising from a non-performing loan.

"We have lived through such a rapid transition from boom-times to a recession that we all need to review our attitudes towards our financial affairs. In boom-times when asset prices were rising, it made little sense to save. In a recession, exactly the opposite is true," asserts Kleynhans.

"Consumers need to adopt a habit of saving. It may take a year to two to accumulate a deposit, but that is exactly the sort of change in behaviour South African consumers need to make. South Africa's traditionally low savings rate has been exacerbated by previously low deposit requirements on mortgage loans," says Kleynhans.

Property Economist at FNB Home Loans, John Loos is cautiously optimistic about the immediate future. "Although interest rate cuts may well spark a mild rise in new loans granted, it will probably be a long time before the growth in the total mortgage or household credit outstanding turns the corner due to leads and lags between new lending trend changes and capital repayments catching up. Given the shaky global and local economic conditions, any rise in new lending is expected to be mild, as it is unlikely that lending institutions will come 'out of the starting blocks' quickly this time around."

FNB claims it's innocent. Who do you think is to blame for the crisis in the property market? Leave a comment below…

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