Johannesburg - In 2008, high interest rates, the
National Credit Act (NCA), the lending policies of commercial banks and a
global financial crisis were all held accountable for poor property sales and
falling house prices.
Now, a year later, conditions have hardly improved. Property sales remain
poor and prices continue to slide. Yet, interest rates have reduced
significantly back to 2006 levels and many commentators are saying that the
worst of the financial crisis may be behind us.
"This gridlock in the industry can only be attributed to a series of deep-
seated misconceptions in the minds of owners, buyers, agents and even some
property market commentators," says Jan Kleynhans, CEO of FNB Home Loans.
"Rocketing prices and rapidly expanding demand some three to four years ago have left
many people with a deep-seated belief that these conditions will return and
they should therefore price to sell and bid to buy accordingly. Sellers -
specifically - have difficulty in accepting that the value of their house is
falling and are extremely wary of selling in a low market if they believe a
recovery is around the corner."
FNB's recent Residential Property Barometer (Q1-2009) agents that were
surveyed indicated that the percentage of properties sold at less than asking
price remains above 80%, suggesting that many sellers are still not realistic
in their pricing.
FNB's view is that recovery will be slow and that further
weakness will extend into 2010. It is this scenario that is partially shaping the
bank's decision-making when it considers an application for residential
mortgage finance.
"Property values need a number of preconditions for growth. The most
important of these is underlying economic vitality. And this condition has been
lacking for some time, particularly in terms of consumer affordability levels
and sluggish income growth or even income contraction. This is exacerbated by
lower consumer confidence levels as the average potential property buyer is
concerned about losing their job or at best a reduction in income growth.
"It
should come as no surprise, then, that prices continue fall in consecutive
surveys reported in the FNB Property Barometer and every other report on the
residential property market. Thus one finds an oversupply of properties,
typically by those needing to sell and sluggish demand due to low consumer
confidence levels," says Kleynhans.
"Financing residential property remains an active business. Across the
banks, thousands of new mortgages are granted every week. While FNB is not a
dominant mortgage-granter and secures about 15% of the market, we are slowly
increasing our market share and continually seeking new business opportunities
despite the lackluster business environment," says Kleynhans.
Recent statements in the media suggesting that banks are actively
withholding residential lending to the point that a lack of credit is
undermining the market are, however, far from the truth. FNB's decline ratio
stands at around 50% of all applications and this level has only increased
moderately in the past 12 months.
Lower deposit
More than 50% of people applying to FNB Home Loans are declined due to a
combination of excessive debt, high living costs or poor credit records.
For customers in good standing however, FNB is currently reviewing its
earlier requirement of a 10% to 15% deposit "across the board".
While deposits will
continue to be a requirement in mortgage finance, lower deposit requirements
will aid affordability without either compromising the customer's debt ratio or
exposing the bank potential losses arising from a non-performing loan.
"We have lived through such a rapid transition from boom-times to a
recession that we all need to review our attitudes towards our financial
affairs. In boom-times when asset prices were rising, it made little sense to
save. In a recession, exactly the opposite is true," asserts Kleynhans.
"Consumers need to adopt a habit of saving. It may take a year to two to
accumulate a deposit, but that is exactly the sort of change in behaviour South
African consumers need to make. South Africa's traditionally low savings rate
has been exacerbated by previously low deposit requirements on mortgage loans,"
says Kleynhans.
Property Economist at FNB Home Loans, John Loos is cautiously optimistic
about the immediate future. "Although interest rate cuts may well spark a mild
rise in new loans granted, it will probably be a long time before the growth in
the total mortgage or household credit outstanding turns the corner due to
leads and lags between new lending trend changes and capital repayments
catching up.
"Given the shaky global and local economic conditions, any rise in
new lending is expected to be mild, as it is unlikely that lending institutions
will come 'out of the starting blocks' quickly this time around."
- I-Net Bridge