The average home price paid by first-time buyers has risen by a modest R37 000 in the past 12 months, but the average home loan installment has increased by almost R700 a month. This is despite the fact that buyers are paying much bigger deposits than they did a year ago.
“This represents a clear decline in affordability for first-time buyers. We believe potential first-time buyers should make a decision about buying property as soon as possible, because it is going to become increasingly difficult for them to become homeowners in the next 12 to 18 months, even if there are no further interest rate increases,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator.*
Interest rate hikes cause larger repayments even with larger deposits
“Our latest statistics show that while the average first-time buyer home price has risen by 5,7% in the past 12 months, the average deposits paid by such buyers (as a percentage of purchase price) has risen from 11,1% to 12,3%, taking the actual rand amount of the average deposit in this sector from R79 000 to R92 000.”
Intuitively, he notes, one would expect this to have lowered the average monthly bond repayment for first-time buyers, “but unfortunately, there were also three interest rate increases in the past 12 months which caused the variable home loan rate to move from 9,5% to 10,5%, and the result has been an increase of almost R700 in the average instalment.”
Larger household incomes needed to secure home loans
“At the same time home prices have continued to rise, albeit slowly, and at this stage are set to keep rising, especially now that South Africa has escaped a rating downgrade, and consumer and business confidence is starting to rise again.”
“This means that prospective buyers are going to need bigger household incomes to qualify for home loans in the coming months. As it is now, the average first-time buyer who pays a deposit requires a household after-tax income of at least R22 000 a month to qualify. This is almost 13% more than was needed a year ago, and most people are not getting salary increases of this magnitude in the current economic climate.”
What is more, says Mr. Rademeyer, even if they did, it might not be enough. “The rising costs of food, transport, electricity and other necessities have really eaten into household disposable incomes in the past year, leaving many aspirant buyers without savings and without sufficient discretionary income to afford a monthly home loan repayment in terms of the National Credit Act.”
“In addition, SA consumers have been warned that they will be paying more tax in 2017, while banks are likely to apply even stricter credit granting criteria in the light of the rising unemployment numbers and the increased risk of default.”
Potential home buyers should not wait to buy
The clear message, he says, is that first-time buyers should not wait any longer to make the leap into home ownership, even if they have to downscale their aspirations and buy a smaller, less expensive home to start with. “And by the looks of things, many people have got it, or are being prompted to consider it as rentals continue to rise across the board.”
“Our figures show that while repeat buyers are still in the majority, the percentage of home loan applications submitted by first-time buyers has risen slightly in the past 12 months, although due to the decline in affordability the percentage of home loans granted to such buyers has remained constant at around 35% of the total.”
Household austerity measures essential
Mr Rademeyer notes that for those who are still preparing to buy, there will really only be one way to counter declining affordability in the coming months, which will be to aggressively lower household debt levels by cutting spending to the bone and diverting every spare rand into paying off high-interest store and credit card balances, vehicle loans and above all, any personal loans, as soon as possible.
“After that, buyers who want to give themselves the best chance of being approved for a home loan really should apply through a reputable mortgage originator such as BetterLife Home Loans, because we are currently still able to secure approvals for 72% of all the applications we submit to the banks, while the general rate of approval is only one in three applications.”
*The BetterLife Home Loans statistics represent 25% of all residential mortgage bonds being registered in the Deeds Office and are thus a reliable indicator of the state of South Africa’s residential property market.
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