House prices are still in decline despite bigger and more loans in South Africa
House prices in South Africa have continued to drop when corrected for inflation even though the average percentage of the home price that a bank lends and the volume of mortgages transactions were at historical high levels in the second quarter of 2019.
Bigger and more loans
The loan-to-purchase-price reached 90.6% in the second quarter of this year –improving from an average of 88% in the second quarter of 2017–, becoming the highest level in more than a decade, the First National Bank Property Barometer showed.
This increase in the percentage that banks lend for properties should be correlated with an increase in residential property transaction volumes, which showed a small growth –around 0.9 %– in August, leaving behind a period of property market underperformance.
At the same time, the value of home loans grew fast. The FNB Property Barometer also shows that the total value of mortgages provided to South Africans grew by 4.3% in the first half of 2019, compared to 3.4% for the same period in 2018, the highest growth since November 2010.
It shows that banks are handling the increasing demand for finance from homebuyers who have no possibilities to purchase a house without taking out a loan.
Both the high loan-to-purchase-price proportion and the growth of the value of home loans translate into a growing number of South Africans who are getting bigger and more loans, which injects liquidity into the residential property market supporting the market.
In other words, there has been not only a small growth in the volume of mortgage transactions, but it is also the case that lenders are, on average, willing to finance a relatively bigger percentage of the purchase price. South Africans have access to more loans, and this eventually contributes to a growth in the residential property market if the amount of mortgage advances keeps up.
Increased interest in the property market
Cautious to lend during recent years, banks are now interested in the residential property market as they become aware that they need to lend money in order to grow. The increase in mortgage advances signals banks’ desire to get back into the residential property market, as they seek to offer more options to finance a bigger proportion of the total purchase price of houses.
Homebuyers are benefitting from a growing desire to lend among the nation’s big banks, as they are offered financing at more attractive terms in order to fuel demand in the property market.
The growth in mortgage advances in August can also be attributed to increased competition between banks. The nation’s big banks are relaxing their lending criteria and approving home loan finance at levels last seen 12 years ago, boosting the demand in the property market.
South African banks are improving their lending criteria for home loans when compared to personal loans, the latter having experienced no change. Homebuyers will certainly benefit from growing opportunities for lending given by banks.
Deflating house prices
Despite all of this, the FNB Property Barometer showed that residential properties price grew by 3.7% in the third quarter and up from 3.4% in the second. These proportions are still below South Africa’s 4.3% inflation rate, which means houses continue to lose value in real terms despite the increased opportunities for lending.
“We expect house prices to remain confined within the 3.5% to 4.5% range for an extended period,” said FNB’s analyst Siphamandla Mkhwanazi. The range is below the central bank’s annual inflation forecast of 4.7% this year.
A blessing in disguise?
House prices in South Africa have been hit by deflation in recent years, but that may not be all too bad, as homebuyers may actually reap some benefits. Affordable property prices, high bank approval rates, relaxed deposit requirements provide an ideal market for home buyers, who can seek to profit from the deflating house prices.
What is positive about negative real property price growth is that property becomes more affordable for buyers. Lower property prices in real terms together with bigger and more loans mean that buyers are not priced out of the property market.
The residential property market has reached lowest levels and it is now a buyers’ market. Nevertheless, it has not showed strong growth in sales volumes yet, as it is in early days.
Sectional title properties are expected to be in higher demand due to their popularity among first-time homebuyers, who consider them as a first step on the property ladder.
This is proof that increased lending has been limited in the higher-priced segments. That is why cheaper homes are in demand compared to more expensive houses which are difficult to sell. The most transactions occur in the market for properties priced below R3 million, with strong demand from first-time buyers. In the luxury segment, with properties priced above R10 million, it takes longer to sell properties.
Homebuyers are taking advantage of the competitiveness among banks, which brings about a wide variety of convenient financing options, and deflating house prices. The new report by the FNB shows exactly that.