House prices drop, fewer loans approved

Published Sep 2, 2008

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By Edwin Naidu and Sapa

Residential property is still in the doldrums, Standard Bank said on Monday in its monthly residential property gauge.

Standard Bank's median house price eased by 1,8 percent year-on-year in August, while the median house price in level terms was R550 000.

The five-month moving average growth was recorded at 7,7 percent year-on-year.

"After a period of mostly National Credit Act (NCA)-induced volatility, Standard Bank's residential property index returned to normality during the last two months and presents a clearer depiction of house price trends, but is still reflective of the tough financial and economic conditions households face," Standard Bank said.

Tough conditions would remain for residential property until fundamental drivers of the market took a turn for the better, which may be some time off.

Recent monthly estimates of growth in the Standard Bank median house price had overstated the extent of the decline in South African residential property prices.

This was the result of the NCA-induced base effect established in the months leading up to the implementation of the act last year.

"Uncertainty regarding the possibility of more stringent credit granting criteria led to an increase in the proportion of higher valued houses in the underlying home loans sample from which the median house price is calculated."

Subsequently, the reduced affordability of housing, exacerbated by higher mortgage rates, led to a decline in the demand for residential property and a substantial softening in house price growth, the bank added.

This was aggravated by the base effect, resulting in the deep negative year-on-year growth rates seen in May and June.

"The July and August outcomes are, in our view, a more accurate reflection of aggregate house price trends."

Meanwhile, figures released by Statistics SA, show that nearly 40 percent of would-be borrowers have had their home loan applications rejected by the country's four main banks since the start of the year as the country's credit crunch deepened - sparked by stringent lending laws, rising inflation and higher interest rates.

Home loan applicants were being turned away in their thousands as banks tightened lending criteria to reduce the surge in bad debts.

Stats SA figures for the first half of this year showed the value of plans approved by municipalities for residential buildings was R2,44-billion, down from R13,05-billion last year.

Auction company Alliance Group reports that the number of home owners in mortgage arrears by at least a month has more than doubled to 55 000 in the past nine months.

Up to 100 000 people apply for home loans every month. But financial institutions said on Monday that the number of home loans granted had come down as interest rates rose and the NCA came into effect last June.

The number of declined applications increased by 40 percent in the two years to June, with 10 interest rate increases pushing mortgage repayments up 43 percent, said Pramod Mohanlal, KwaZulu-Natal general manager of client value management for Nedbank home loans.

Increases in the price of food and petrol, and the rise in interest rates have affected people's ability to pay for homes, he said.

Mohanlal said borrowers who had been turned down tended to rent instead of buying, though some chose to buy cheaper properties.

Some people who already had homes were struggling to meet loan repayments, resulting in more repossessions and auctions since the start of the year.

Gavin Opperman, Absa group executive of retail secured lending, said the value of applications approved by the bank's loan division had fallen 39 percent in a year.

This was a direct result of house price growth and strain on consumers.

About R975-million, of a R216-billion home loan book, had been written off as bad debts, he said.

Dawie Spangenberg, FNB home loans head of strategic credit, said approval rates had fallen in the past two years across the industry, while house prices and rates had gone up.

Property expert Paul Duncan said house prices would go up over the next 18 months, with the downturn to last until late 2009 when interest rate cuts were expected.

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