Mike van Alphen, the National Manager for the Rawson Property Group’s bond origination division, Rawson Finance, has drawn attention to a statement by the Rawson Property Group’s Chairman, Bill Rawson, in his first ever blog post, which will be published shortly.
“Bill Rawson had pointed out, at what I believe is exactly the right time, how fortunate today’s home purchasers are in comparison to those who wanted to buy when he and I were at the start of our careers – some 40 years ago – but were so often unable to do so.”
In those days, said van Alphen, the banks had not yet become involved in home finance – or in the many other forms of personal finance which surround it – and 95% of the funding for homes came through the building societies.
These societies, however, had none of the borrowing facilities now available to banks through the South African Reserve Bank, which meant that before they could loan money, they had to collect it. This they did mainly from their investment products for businesses and private individuals, to whom they usually paid a fixed deposit interest at a rate of +-7%. These investment funds would then in turn be lent to a home buyer at a rate of 9%.
This money supply, said van Alphen, fluctuated and at times dried up, causing bond approvals to be delayed or even cancelled. Many approved applications, he said, could be held on ice for three to six months.
To make matters even more difficult, said van Alphen, the building societies often refused to loan more than 75% of the home’s value. The bond applicant needing more than this, had then to arrange for an additional sum to be deposited with the society which would be used as collateral security. This was usually done by his employer, a family member, a friend or if the applicant was a civil servant, such as school teacher, policeman or a nurse, arrangements would be made by the state to guarantee the required deposit.
“Another difficulty with the old system,” said van Alphen, “was that if and when investment funds were required, in order to lend money to a potential home buyer, the investment very often came through the “grey market” - i.e. consultants who were money collectors in their own right and who were able to charge a “raising fee” of +-7%. This, of course, added considerably to the bond applicant’s costs, as this extra cost would be for his account - and this was crippling for many.”
In the circumstances, said van Alphen, it should come as no surprise to learn that first time buyers from disadvantaged areas were very thin on the ground in the mid-1980s (again, unless they worked for the government) and, he added, very few bonds were paid up ahead of their loan period.
By way of contrast, said van Alphen, we are seeing a 16% year-on-year increase in the number of bonds being granted to families earning under R16,000 per month. Although this is nowhere near what it was in the boom period of 2007/2008, it is a satisfactory result in the circumstances.
“What we are now seeing today is that the average home price in South Africa is rising by some 6% per annum (roughly 1% per annum in real terms) and is approaching R900, 000. Furthermore, 45% of today’s buyers are buying in the R400, 000 to R1 million bracket, indicating that members of the emerging middle class are now the chief beneficiaries of the current home finance system.
“It has to be recognized that all this is a big step-up towards wealth distribution and the equalizing of privilege in what is still a very unbalanced society economically. Those who are striving for a more equitable South Africa can take heart from the fact that it is no longer the privileged classes who are the main recipients of bond finance, but rather those who in many ways were previously disadvantaged.”
