Many first-time buyers have to take out personal loans to put down a deposit for a home loan. Picture: Rodnae Productions/Pexels
First-time home buyers desperate to purchase property are resorting to taking out personal loans to help them get a mortgage.
There has also been an increase in the number of aspiring owners turning to the Government’s Finance-linked Individual Subsidy Programme (Flisp), states FNB Property economist Siphamandla Mkhwanazi.
Even though house price growth is dropping, many South Africans cannot afford to put down deposits, and are mainly relying on 100%+ bonds.
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In the latest FNB Property Barometer, Mkhwanazi says 73% of first-time buyers are using bonds of 100% or higher as their primary means of funding their home purchases. This figure for Q4 2022 is slightly higher than that from Q4 2021.
Furthermore, only 16% have sufficient savings to help them get approved for a home loan, and 5% are turning to the Flisp subsidy.
“As affordability becomes more stretched, we expect home buying activity to decrease in the coming months. In particular, the steep interest rate hiking cycle and elevated inflation have eroded affordability, making it difficult for buyers to save enough for a down payment,” Mkhwanazi says.
An interesting trend that was not really seen at the end of 2021, but was being used by 5% of buyers a year later as at Q4 2022, is taking our personal loans from banks to help them secure mortgages.
“Anecdotal evidence suggests that some first-time buyers have turned to unsecured lending to fund their upfront deposit. Additionally, there has been an increase in reliance on government subsidy programs such as Flisp to help these buyers enter the market.”
He adds that internal mortgage applications data further supports the rising popularity of home loans with lengthier payment periods, such as longer than 20 years. This, however, is being seen more predominantly among lower-income earners.
“Notably, however, homeowners have an inclination to pre-pay their mortgages. In Q4 2022, the average holding period for a mortgage was around 92 months (seven years and six months), but lengthens to 119 months (approximately 10 years) for more affordable properties.
“Mitigating against the weaker fundamentals are factors such as changes in consumer preferences due to the pandemic, structurally improved affordability, credit availability, and a higher household formation rate.”
Mkhwanazi also states that debt-to-income and debt-servicing ratios remain low by historical standards. Lenders are therefore expected to be more competitive and offer more affordable options to attract customers, countering the effects of higher borrowing costs.
“Non-labour income is also expected to remain relatively supportive of activity in higher-income market segments.”
Non-labour income includes capital gains, dividends, interest, transfer payments, gifts, and prizes.
This article will help you figure out if you earn enough to get a home loan this year.
The affordable market
In the report, Mkhwanazi says this market is expected to see a decline in sales volumes and price growth as households face financial strain. However, some lenders are putting more focus on this market and introducing innovations to improve affordability, such as longer mortgage terms, collective buying options, and more streamlined administration of FLISP.
“Additionally, volumes will benefit from people moving from high-priced properties due to rising debt costs.”
Despite the expected downward pressure on prices, he says the persistent shortage of housing and strong desire for home ownership will partially off-set it.
Middle-price market
Although the latest employment data showed a “positive surprise” with job gains, Mkhwanazi notes that the majority were low-quality jobs. This, combined with the ongoing global economic slowdown, increases the likelihood of a downturn in activity.
“As a result, we anticipate a decrease in buying activity. However, stable interest rates and increased competition in credit markets should help support activity. Additionally, modest household savings may provide some relief against rising living expenses.”
Forecasting house price inflation (HPI) for 2023, Paul-Roux De Kock, chief analytics officer at Lightstone, believes the mid-value market segment “should be more resilient” than other segments as it will gain from the more active informal economy as well as activity from buyers out of the higher value segments wanting to downscale. This will be welcome news from homeowners and sellers in this segment as, in a worst-case scenario prediction, house price growth is expected to only drop to 1.2%. It even has the potential to reach 4.2% in a ‘best-case scenario outlook.
Affluent markets
After a productive 2021 and 2022, marked by favourable pricing, a robust recovery in non-labour income, improved balance sheets in the aftermath of the pandemic, and the rise of remote work, Mkhwanazi expects a decrease in buying activity this year, partly due to a drop in buyer confidence. That said, supply-side factors may mitigate the impact on price growth.
“Sales related to emigration have slowed, and construction of new housing units should continue to decline.”
Higher-value outstanding mortgages in sections of the luxury market segment have seen this segment more negatively affected by the upward interest rate cycle, and Lightstone expects this to continue under the both the worst-case and middle-case scenario forecasts.
“In our High HPI scenario we expect HPI in this market to start recovering sooner than the lower value market segments, but coming off a low base we see limited upside potential in 2023”, De Kock says.
House price growth
Analysing average house price growth for 2023, Lightstone reveals its expectations based on three scenarios: low, middle, and high.
– Low HPI scenario – 0.9%
If the economy stagnates at 0% GDP growth and core inflation drops to 3%, De Kock says South Africa might experience an accelerated decline in HPI, ending the year at 0.9% with a negative trajectory for 2024.
“Under such a scenario the South African Reserve Bank (SARB) might stop the upward interest rate cycle sooner – only increasing it by 0.5% for the year – offering some consolation to homeowners with outstanding debt.
– Mid HPI scenario – 2.3%
If the country’s economy follows the base line GDP growth expectation of 0.3%, the analytics firm expects the SARB to take a moderate approach to interest rate hikes with rates rising slowly by a total of 1% for the year.
“We expect core inflation to drop to 4% in such a scenario, and HPI is forecasted to continue the slow decline we’ve seen for more than a year and end 2023 at 2.3%.”
– High HPI scenario – 3.7%
Under a scenario where the economy sufficiently recovers to support GDP growth of 1.1%, De Kock says Lightstone expects core inflation to climb to 5.5% with interest rates increasing by 200 basis points.
“Under such a scenario we forecast HPI to bounce back in the second quarter and end 2023 at 3.7% with strong upward momentum going into 2024,” he says.
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