First-time and black buyers drive the market, but are getting older
First-time buyers continue to drive the South African home loan market, where some 54% of applications come from this segment. This has an impact on loan to value (LTV), with 51% of applicants requesting a loan at 100% LTV. The percentage of final grants at 100% LTV, however, drops to 37%. We have already started to see the impact of interest rate increases as well as general increases in cost of living expenses on the consumer. Our approval rate has dropped from 76% in the first quarter of 2015, to 72% now.
This is driven almost exclusively by a greater percentage of affordability declines, where consumers sign an offer to purchase on a property that they simply cannot afford. Decline rates on average across banks are up from 42% a year ago to 45% today. The importance of being prequalified before putting in an offer on a property is highlighted in these stats.
Calculate with rate rises in mind
Banks are building in interest rate increase buffers into their affordability calculations, so even if you have sufficient surplus income now to make the bond repayment, banks will test in the affordability calculations the room you have to continue to afford the repayment should interest rates continue to rise.
New homebuyers are encouraged to purchase within their means (and not at their affordability limit), and to be prequalified before they go searching for property. Bank competition for loans is very strong, with all the banks’ home loan divisions showing strong profitability. As a result, we have seen improvement in interest rate pricing on loans, with the average rate across our new business having reduced from prime plus 0.48% a year ago to prime plus 0.27% now. We have also seen a strong increase in the percentage mix of black applicants through our business over the year, with this market representing 48% of buyers from 41% a year ago. Self-employed applicants remain at about 10% of our total applicants, down from a peak of 20% in 2006 and 2007.
The residential property market is still driven almost exclusively by South Africans buying primary residences. The second-home and buy-to-let markets remain a very small percentage of buyers, as does the foreign buyer component. The number of property transactions year-on-year are not showing any significant growth, with calendar year 2014 only showing a 2% growth in number of properties sold over 2013, and with 2015 sales on 2014 also looking pedestrian. According to FNB data, 44% of buyers are currently below the age of 40 years. This is compared to 56% in 2002. The current average age of buyers is 43.6 years, as compared to 40.7 years in 2007. This seems to imply that the younger buyers are more financially constrained than was historically the case driven by economic factors as well as the average level of real house prices being at multi-decade highs – the result being that home buyers are delaying their home buying decision until later.
Sectional title properties in the R750,000 to R1,5m band continue to show increased demand – given the relative affordability, convenience and security of these properties. This is combined with a need to contain household costs, including municipal rates, utilities and maintenance – sectional title properties, specifically close to CBDs, is a key trend. This increased demand for sectional title properties will drive price growth of this segment which is expected to continue to outperform freehold price appreciation as demand consistently exceeds supply. And as densification in major metro areas continues, with housing demand increasingly focused around public transport infrastructure, homeowners are likely to be willing to sacrifice space for the convenience of location, further underpinning demand for sectional title properties close to the CBDs.
We do not expect to see a significant change in market dynamics in 2016. The residential property sector is still constrained in terms of supply, with insufficient stock levels added to the market over the past seven or eight years. Our market therefore remains fairly well balanced in terms of supply and demand, which is likely to continue into 2016.
While there were increases in supply in the first half of last year, with residential buildings completed stats growing in excess of 20%, the last quarter dropped to 8%. This is coupled with reduced demand as a result of slow economic growth, interest rate increases, cost of living rises and buyer job uncertainty, all of which will likely bring about a market slowdown during 2016. We don’t, however, believe we will see any significant changes in property price growth over the year.
Prices are currently growing at between 6% and 7%, and we expect this to continue with some slight deterioration. Given likely inflation increases, however, we expect to see some deterioration in real house price growth over 2016. As exchange rates continue to weaken we would expect to see the percentage of foreign buyers increase over time, given the relative affordability of SA property – this sector, however, remains no more than 3% to 5% of the market and is unlikely to be a significant driver of overall demand.
Looking ahead at home loan market trends
Off the back of what is expected to be a fairly flat level of property market sales volumes as compared to 2015, and with home loan lenders continuing to compete strongly for business, we don’t expect to see any significant changes in the home loan lending environment in 2016. Having said that, given the expected poor economic growth position which will place pressure on job security, coupled with an increasing inflation environment off the back of the decline in the rand, the consumer will no doubt come under increased affordability pressure.
This is likely to result in increased decline rates across banks resulting in lower approval rates. We would also expect to see the mix of home loan applicants changing, with a lower percentage of first-time home buyers in the market, as these consumers delay their home buying decisions until the economic position improves. We would also expect to see buyers buying within their affordability constraints, at lower levels, and banks incentivising buyers to put down larger deposits. Banks will remain hawkish, and will tailor the lending approaches, both in terms of the home buyer and the property itself to contain risk, should the poor economic growth position continue.
Written by Rhys Dyer, CEO of bond originator, ooba.