Do you know if banks have ‘red-lined’ your suburb?
It’s every seller’s worst nightmare: You enlist an estate agent and place your home on the market, get a few serious enquiries and an offer to purchase, only to have the buyer’s bond application rejected. A new potential buyer puts in an offer and again their bond is rejected.
Your agent assures you that all buyers have been prequalified and can easily afford to pay for the house and its associated costs, and that the asking price is on par with the surrounding neighbourhood and property type. So, what is the problem then?
Your suburb, street, estate or complex may have been “red-lined” by the banks: This means they have deemed too much risk in the surrounding area to finance the sale of your home to a qualifying buyer – simply because the bank’s risk to recover its costs is too high should the buyer default.
It’s happening in Eerste River
Hendrik Pieterse, manager of Leapfrog Property Group in Eerste River in the Western Cape, believes that red-lining by banks is common practice in Eerste River.
“In our experience some of the banks are deciding where buyers can and cannot buy by declining home loans on certain properties (and in certain areas), where I know another bank will grant a mortgage,” he says, noting that red-lining is a decision made by a bank (but never admitted to) during which the institution demarcates an area as too risky and refuses to approve home loans. “In my opinion some of the banks are keeping the young and the poor out of the property market by not granting home loans in certain areas due to safety concerns.
“Banks would still accept applications and just decline them, which of course is problematic. The types of areas that are deemed too risky tend to be close to townships, areas of high crime and the like.”
According to Ewald Kellerman, Absa’s chief risk officer for mortgages, Absa retail and business banking, crime will influence the demand for property and the value of properties in the area.
“Crime and proximity to informal settlements and RDP housing are not specific factors that the bank assesses, however our valuation methodology intrinsically includes all factors that could affect the price since the valuation is based on actual market transactions,” he says. “For example, if properties next to a noisy industrial area have transacted at a certain level, we assume that buyers have already taken this information into account when they offered the price.”
Greg Nathan from Showday Properties says red-lining has been going on for a long time and that banks do consider internal and external environmental risks that have nothing to do with the bond holder.
“The best approach for red-lined suburbs is to ask the bank how defensive they will be prior to sale on that specific address,” he says, noting that it goes down to the level of the owner’s erf address and that agents need to be prepared to deal with the specific bank’s defensive strategy. “That way you know which ‘kata’ to perform as a property practitioner. The key is to ask first before taking on the property; if in doubt, ask before it’s too late as banks are helpful.”
An agent worth their salt will be prepared for a proactive approach.
Monica Coetzee, director of Monre Estates, says Windsor East and West near Cresta in Johannesburg are considered high-risk areas for all the banks: Complexes are run without proper accounting practises and little to no maintenance throughout these areas.
“This is aggravated by high crime and banks don’t grant bonds,” she says, noting that buyers are forced to buy with cash, and these are mostly investors. “Property professionals in the area know that they will be sourcing a cash buyer or should rather walk away from the mandate. Overexposure by the bank is not even a consideration in such an area.”
Do banks make predictions on the health of the surrounding housing market?
Kellerman says the credit assessment and the valuation processes do make provision for this in that credit decisions are often based on assessing the most recent past in order to predict what may happen in future.
“This both applies to a customer’s credit behaviour as well as the value of a property. Unfortunately we are not in a position to speculate on the movement in property prices, but can consider known risks in the market when assessing security values,” he says, noting that they restrict their exposure to areas where they have seen a drop in demand, deterioration in the quality and maintenance of properties. “One of the most difficult areas to lend is where new areas or developments are planned without an established market. In these developments we start small and try to ‘prove’ the demand before increasing our exposure.”
Back in Eerste River, Pieterse says his agency often lists a property and the valuators from certain banks will devalue the property in their estimates. In his opinion, this is just wrong.
“Younger people find it hard to get a house in the areas they grew up in because the banks decide for them (by denying their home loan application), especially if there are RDP houses near property in question,” says Pieterse. “Eerste River locals often want to stay in the area to be close to their families, while growing their own nuclear family. Young couples are generally looking for a freehold property with the option to expand the home as their needs increase. Pieterse notes that the average freehold property sells for between R400,000 and R600,000 and that buyers are happy to purchase, even near RDP housing, as they secure the property themselves with fencing, alarms and the like.
“Considering that the average household income in Eerste River is between R9,000 and R17,000, it’s clear that these buyers will need home loans.”
Jan le Roux, CE of the Real Estate Business Owners of South Africa (Rebosa), says there are a number of options available to banks and buyers.
“Where banks can do so much better is to be honest about specific areas, saying that they’ve had bad experiences and, instead of outright refusing the application, can offer alternatives such as asking for higher deposits, a lower ratio of what the purchaser is allowed to borrow (normally a buyer can commit 30% of his or her income on home loan repayments, so perhaps this can be lowered to 25%), or insisting on a collateral investment from a family member to reduce the banks’ risk”.
Le Roux says industry in these areas can and should be showing their commitment to the neighbourhood by investing 50% of their commission as a collateral investment in the loan.
“Collateral investments are always for a specific time frame and the funds will be reimbursed after a certain period, once the bank’s risk has been sufficiently lowered,” he says. “I believe that this shows a tremendous amount of faith in the area by the agent.”
These are Absa’s property risk factors
- The bank considers the type of property (freehold, sectional title), and the condition of the property in respect of the security value that it will provide. The value will be influenced by the location of the property and the condition of the property.
- Other factors are the number of comparable sales in the area and the values at which those properties sold for.
- Most importantly, the market value is determined on a comparable sales basis. This helps the bank understand if the price paid for the property is reasonable. In addition to the value, our valuers assess the characteristics of the property and provide guidance on how we should lend based on factors that affect the value we may recover if we had to help the customer sell (HelpUSell), or call on the property through a Sale in Execution.
Some examples of the different property characteristics that affect the security values are the use of the property (communes, guest houses, holiday property etc.), whether it has specific characteristics (10 bedrooms, unconventional construction) or specific property types (vacant land, agricultural holdings) that could affect the value that can be realised if the property is sold.
These are FNB’s property risk factors
- Marketability of the property and ability to maintain value over time
- Activity in the area (time in the market, supply and demand, etc.) thus the liquidity of the property
- General price trends in the area
- The value of the property in relation to the rest in the area
- Location of the property
* Standard Bank and Nedbank were approached for comment