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Johannesburg – Sharp increases in the cost of occupying one’s own home are making home ownership increasingly expensive.
Despite the lowest interest rates in decades, prospective home buyers have to make provision for more than the monthly instalments and budget for additional expenses such as electricity tariffs, property rates, rubbish collection and water and sanitation services.
In the past year these expenses have escalated and future increases cannot be discounted. Home buyers should therefore have a couple of financial buffers to be able to absorb future shocks.
The balance sheets of households neglecting to attend to this could come under severe pressure, as well as their ability to meet their debt obligations.
To illustrate the impact of running costs on households in different income groups, Standard Bank has analysed three scenarios in its latest home loan report. These scenarios apply to freestanding properties.
The banks says a small household paying a monthly mortgage instalment of around R3 600 can expect monthly running expenses of between R750 and R1 135.
A medium-sized household with a monthly home loan instalment of around R6 748 should budget for running costs of R1 768 to R2 038.
A large household with a R13 496 instalment can expect running costs of R3 600 to R4 349 a month.
Standard Bank says the costing can differ between metropolitan areas and also for households purchasing prepaid electricity, for example. The above calculations are based on tariffs for the 2011-2012 financial year.
The Johannesburg City Council’s proposed tariffs for the 2012-2013 financial year, which were published last week, indicate that electricity could rise by 14%, water by 14.5% and property rates 6%.
Mike Schüssler, chief economist at Economists.co.za, says households are already under pressure in terms of their municipal payments. “Consumers and businesses’ bad debts to municipalities run to an astronomical R58bn, almost 2% of the gross domestic product,” he says. This is for accounts that are more than three months overdue.
He says people can no longer afford the increases and will increasing get into arrear. “The big problem will arise when interest rates start to rise.”
John Loos, property analyst at First National Bank, says consumers’ widespread financial difficulties are masked by the low interest-rate environment. “But if one looks at the proportion of homeowners who need to scale down, owing to financial pressures, household finances do not look too healthy.”
Downscaling currently involves around 20% of all transactions, according to FNB’s agents survey.
Loos says that although household indebtedness as a percentage of disposable income has come down from 83% in 2008 to 74.6% at the end of last year, the situation will ease only when the figure declines to less than 70%.
He is also worried that the ratio of indebtedness will soon rise, driven by the sharp rise in short-term household indebtedness, such as unsecured loans and credit and store cards.
Despite the low interest-rate environment, government is busy dramatically increasing other costs. “The multi-year tariff increases by Eskom are stale news, but municipal rates and water tariffs are also rising sharply.”
Then, he says, there is also the controversial proposed tolling of Gauteng roads, which will seriously impact households’ transport expenses.
Although the Reserve Bank left the repo rate unchanged last week and banks therefore did not raise their rates, he says rates will certainly rise – it’s only a question of when and by how much.
The expected cost increases related to housing and transport will lead to greater urban population densities. Loos says that since the 1970s there has been a long-term trend towards smaller stands and smaller houses.
“The trend will now continue unabated as households try to reduce their expenses.”
Despite the lowest interest rates in decades, prospective home buyers have to make provision for more than the monthly instalments and budget for additional expenses such as electricity tariffs, property rates, rubbish collection and water and sanitation services.
In the past year these expenses have escalated and future increases cannot be discounted. Home buyers should therefore have a couple of financial buffers to be able to absorb future shocks.
The balance sheets of households neglecting to attend to this could come under severe pressure, as well as their ability to meet their debt obligations.
To illustrate the impact of running costs on households in different income groups, Standard Bank has analysed three scenarios in its latest home loan report. These scenarios apply to freestanding properties.
The banks says a small household paying a monthly mortgage instalment of around R3 600 can expect monthly running expenses of between R750 and R1 135.
A medium-sized household with a monthly home loan instalment of around R6 748 should budget for running costs of R1 768 to R2 038.
A large household with a R13 496 instalment can expect running costs of R3 600 to R4 349 a month.
Standard Bank says the costing can differ between metropolitan areas and also for households purchasing prepaid electricity, for example. The above calculations are based on tariffs for the 2011-2012 financial year.
The Johannesburg City Council’s proposed tariffs for the 2012-2013 financial year, which were published last week, indicate that electricity could rise by 14%, water by 14.5% and property rates 6%.
Mike Schüssler, chief economist at Economists.co.za, says households are already under pressure in terms of their municipal payments. “Consumers and businesses’ bad debts to municipalities run to an astronomical R58bn, almost 2% of the gross domestic product,” he says. This is for accounts that are more than three months overdue.
He says people can no longer afford the increases and will increasing get into arrear. “The big problem will arise when interest rates start to rise.”
John Loos, property analyst at First National Bank, says consumers’ widespread financial difficulties are masked by the low interest-rate environment. “But if one looks at the proportion of homeowners who need to scale down, owing to financial pressures, household finances do not look too healthy.”
Downscaling currently involves around 20% of all transactions, according to FNB’s agents survey.
Loos says that although household indebtedness as a percentage of disposable income has come down from 83% in 2008 to 74.6% at the end of last year, the situation will ease only when the figure declines to less than 70%.
He is also worried that the ratio of indebtedness will soon rise, driven by the sharp rise in short-term household indebtedness, such as unsecured loans and credit and store cards.
Despite the low interest-rate environment, government is busy dramatically increasing other costs. “The multi-year tariff increases by Eskom are stale news, but municipal rates and water tariffs are also rising sharply.”
Then, he says, there is also the controversial proposed tolling of Gauteng roads, which will seriously impact households’ transport expenses.
Although the Reserve Bank left the repo rate unchanged last week and banks therefore did not raise their rates, he says rates will certainly rise – it’s only a question of when and by how much.
The expected cost increases related to housing and transport will lead to greater urban population densities. Loos says that since the 1970s there has been a long-term trend towards smaller stands and smaller houses.
“The trend will now continue unabated as households try to reduce their expenses.”
