The news that another major South African commercial bank, following a significant rise in profits has committed itself to working for an increased share of the home mortgage market and that they will, in particular, be targeting first time home buyers and the affordable sector is very welcome and encouraging, says Tony Clarke, MD of the Rawson Property Group. He recently attended a presentation by the bank in question on behalf of Rawson’s bond origination division, Rawson Finance.
“The real estate industry,” said Clarke, “has been canvassing South African banks for some 18 months to up their involvement in home finance. It is gratifying, therefore, to see that they are now ready to do so.”
The fundamental flaw in the banks’ approach thus far, said Clarke, has been that they tended to judge the market on a short term 12 month basis. With home loans, this, he said, makes absolutely no sense because in the majority of cases they will run for anything up to 20 years.
“Typically,” he said, “homes in South Africa change owners every five to seven years. Anyone assessing the potential returns on this market has, therefore, to understand the long term cycles to which property values almost invariably conform – and the figures here have historically always been satisfactory. The latest FNB Property Barometer, for example, shows that since 2000, in nominal terms, South African home prices have risen by 235% - a highly satisfactory appreciation by any standards.”
Right now in South Africa, any institution contemplating increasing its involvement in home finance could, said Clarke, find excellent reasons for optimism as the long-awaited first green shoots of growth are now clearly evident. In particular, he said, the banks should by now have registered that a 9% year-on-year average house price growth was recorded by FNB in April this year. They should also, he said, have become aware that buyer confidence in property has increased steadily since it became evident that interest rates were unlikely to rise drastically in the near future.
Until recently, said Clarke, the entire home finance sector has been held back by the banks’ reluctance to take the size of the purchaser’s equity in the property into account. Instead, he said, they have for the last two years made their assessments almost entirely on salary earnings – even share returns were in many cases completely ignored. This, he said, had led to the ‘ridiculous’ situation where a buyer could put down a 50% deposit – and still find himself unable to get a bond.
Now, said Clarke, the banks have indicated that they will take a broader view and factor in not only the client’s monthly earnings but also the size of the equity at the outset that he puts into the property purchase.
“The latest higher prices (the average South African house price is now up to R876,000) and the recent steady growth in these prices,” said Clarke, “should however, not lead sellers to think that they can once again achieve 2007/2008 prices. That happy state of affairs has not yet materialized. Bargain hunters are still active in the market and are frequently able to get distressed or repossessed properties at 30% to 40% off their previous market values. It could be another 12 months before the housing market is once again on an even keel. This is, therefore, a good time to buy, but not a good time to start raising sale price expectancy.”
