It is bleak. No doubt about it, the current state of South Africans’ household finances is bleak.
And this is really not a good situation for aspiring homeowners.
The cost of living continues to climb and the past three years have seen finance costs soar, with the prime lending rate rising 4.75% since July 2020, states Leonard Kondowe, finance manager for Rawson Finance.
This has had a “significant impact” on consumer affordability and dramatically reduced the pool of qualified applicants on the home loan market. While banks are still eager to lend money to qualified buyers, they are not making the same offers they were a few months back.
“Lenders are hungry for qualified bond applicants at the moment. They are fighting for every client who meets their affordability criteria, which gives strong applicants a valuable bargaining chip during negotiations.”
Despite the hot competition, finance offers have “cooled to some degree”.
“We’re definitely not seeing big concessions like prime minus 1.5% on a regular basis as was the case before,” Kondowe says, adding that, currently, anything below prime “can be considered a good deal”.
Most offers are falling between prime and prime minus 0.45%.
Bonds of 100% to 105% are still available, but he notes that these inevitably come with less favourable interest rates. It is therefore recommended that prospective buyers save for a deposit, where possible, in order to secure the lowest possible interest rates and minimise their monthly repayments.
“We’re in a volatile economic situation right now. Interest rates could keep climbing for some time to come, which means it's important to think ahead in terms of affordability.”
Although banks do some of this work for buyers by taking interest rate fluctuations into account during their affordability assessments, Kondowe says it is not wise to rely on this alone.
Rather, buyers should ensure that their monthly repayments start off at a level where they can safely afford interest rate increases of at least another one or two percent. This can either be done by buying below their maximum qualified amount threshold, or by opting into a longer loan term of 30 years instead of the usual 20.
But just remember, the longer your loan term, the more interest one will pay over its lifetime.
“So I wouldn’t choose that option unless you’re confident you can put more than your minimum repayment in from early on. Going through the pre-qualification process is a great opportunity to run the numbers for various scenarios with the help of your bond originator and find the best – and most future-proof – finance structure for your needs.”
Echoing Kondowe’s concerns, Rhys Dyer, chief executive of ooba Home Loans, says affordability in the local residential property market remains of crucial concern to homebuyers – and affordability, in this context, is determined by how comfortably a buyer can afford their monthly repayments relative to their gross monthly income.
That said, he notes that debt levels among ooba’s homebuyers have yet to reach unsustainable levels.
“Home loan instalments as a percentage of gross income increased to only 20.3% in Q1 '23, comfortably below the industry benchmark of 30% of gross income.”
Looking back, Dyer says, affordability levels deteriorated significantly during the first two quarters of 2020, coinciding with the onset of the Covid-19 pandemic and the initial hard lockdown measures implemented by the government. The hard lockdown resulted in the closure of various industries, including travel, transportation, hospitality, and events, which negatively impacted the income of many South Africans.
Using the graph below, he explains that affordability continued to deteriorate, reaching a peak in Q1'22 before beginning to gradually improve due to the growth in national average incomes and slow House Price Inflation (HPI).
“Our latest data illustrates that house prices rose by 17.4% between Q1 ‘19 and Q4 ‘22, while average earnings, as measured by Statistics SA, increased by 22.6% for the same period. This resulted in a net improvement in housing affordability, despite the ongoing market volatility over the four-year period," he adds.
Buyers have, therefore, been taking advantage of the low HPI.
Dyer says the combination of increased income levels and a relatively low growth rate in the price of properties purchased by applicants throughout the country has had a significant impact on the purchasing power of homebuyers, indicating that there is still scope for affordability at current level of interest rates. Sixty percent of ooba Home Loan’s customers granted bonds in the first quarter of 2023 were for homes priced above R1.5 million – compared to just 47% of customers in the first quarter of 2019.
“Whilst this statistic suggests that a significant number of buyers are opting for more expensive properties, we are also seeing a substantial growth in the size of average deposits buyers are putting down. This indicates that buyers are prioritising deposits to off-set the higher cost of financing in the current high-interest-rate cycle.
“While a higher interest rate environment is not without its challenges, the slower growth in property prices coupled with relatively strong consumer affordability and good availability of financing means that there are still plenty of good investment opportunities to be found in South Africa’s residential property market,” he says.
Lightstone’s latest Residential Property Index states that national HPI is 3.16% annually, which is the same as it was last month.
When comparing provinces, the data shows that this inflation remained steady in KwaZulu-Natal and the Western Cape, increased in Limpopo and Mpumalanga, and decreased in the Eastern Cape, Free State, Gauteng, North West and the Northern Cape.