Credit Crunch | SUTRA Magazine
Monday, 11 December, 2017
Credit Crunch

Credit Crunch

One of the hot topics at present is the state of the real estate industry and the effect that the banks have on the property market. We discuss some of the current issues that hopefully provides you with a better understanding of the housing market.

Mortgage finance

Commercial banks’ variable mortgage interest rates were cut by a cumulative 450 basis points since December 2008 to reach a level of 11% by the end of May 2009. Interest rates were left unchanged in June and July this year. In view of the above-mentioned interest rate movements, monthly mortgage repayments were 23,8% lower by the end of June compared to December 2008 when the mortgage rate was still 15,5%.

During the boom times the banks as mortgagees were trying to increase market share i.e. chasing volume at the expense of profit margins. Interest rates of prime minus 2% were common. Now, with sales volumes down and risks higher, banks can no longer afford these tight spreads and are forced to restore margins. As a consequence, prime plus 2% is now common. By concentrating on increasing their margins, the banks have effectively neutralised the lowering of interest rates by the Reserve Bank. In other words, for the man in the street servicing a new mortgage bond, interest rates haven’t come down by much.

Not only has the effective cost of credit not come down by much, but banks are now also insisting on deposits of 10-20%. Many industry leaders believe that the banks in the past years have been irresponsible in their lending policies, thereby creating the bubble which spurred the excessive growth in property prices during 2006 and 2007. Lending at 108% of value is an example. The net effect of this is that we are now sitting with a generation of first-time home-buyers who must first save for a deposit before buying; thus being unable to buy.

The financial meltdown has reintroduced a fundamental rule of banking, namely that the mortgagor must also have a significant financial stake in the bonded property. The NCA also had the effect of making banks more conservative in granting mortgage bonds. In the Property Professional (July/August edition), Tony Clarke, MD of Rawson properties mentions that the risk averse attitude of S A’s banks – not the recession – is the main reason why the housing market is still so sluggish. “Look the demand for housing is there – but the finance is not.” The lending criteria are very strict and also changes often.

One of the unintended effects of the National Credit Act (NCA) is that it now takes banks much longer, and at greater expense, to collect debt, foreclose and write off bad debt. The prescribed procedures opened the door for debtors to lengthen the process by going through debt counselling while still staying in their houses. The courts are inundated with applications waiting for judgement and attachment.

At the end of the day it appears that the banks are protecting themselves. It is also evident that the situation is not likely to improve in the near future, or at least until the market shows extensive positive growth. The motto seems to be: rather no business than bad business. And who can blame them?

Economic outlook and prospects for the housing market

The South African economy is forecast to contract by a real 1,9% in 2009, after growing by 3,1% in 2008. It will be the first recession in the South African economy since 1992, when real gross domestic product contracted by 2,1%. The current economic conditions are having a devastating effect on employment in many sectors of the economy, negatively impacting household income. With headline consumer price inflation expected to reach the 6% level by mid- 2010 only, the Reserve Bank’s Monetary Policy Committee is forecast to leave the repo rate unchanged for the rest of 2009 and into 2010. Banks’ prime lending and variable mortgage interest rates are thus projected to remain stable at the current level of 11% during this period. Nominal house price deflation is set to continue for the rest of 2009, starting to slow down towards the end of the year. This will be the second consecutive year of lower real house prices. The lagged effect of lower interest rates and a moderate recovery in the economy later this year are factors which will contribute to an expected gradual improvement in residential property market conditions in 2010.

Please note that the information provided does not constitute expert legal or financial advice. You should consult a professional legal or financial adviser for expert advice. We have mentioned the National Credit Act. The Act contains many sections and details that have not been mentioned. There may be other legislation that is also applicable. For more information on other legislation and the Act, you should consult a legal professional.

The net effect of this is that we are now sitting with a generation of first-time home-buyers who must first save for a deposit before buying; thus being unable to buy.

The financial meltdown has reintroduced a fundamental rule of banking, namely that the mortgagor must also have a significant financial stake in the bonded property. The NCA also had the effect of making banks more conservative in granting mortgage bonds. In the Property Professional (July/August edition), Tony Clarke, MD of Rawson Properties mentions that the risk averse attitude of S A’s banks – not the recession – is the main reason why the housing market is still so sluggish. “Look, the demand for housing is there – but the finance is not.” The lending criteria are very strict and also changes often.

One of the unintended effects of the National Credit Act (NCA) is that it now takes banks much longer, and at greater expense, to collect debt, foreclose and write off bad debt. The prescribed procedures opened the door for debtors to lengthen the process by going through debt counselling while still staying in their houses. The courts are inundated with applications waiting for judgement and attachment.

At the end of the day it appears that the banks are protecting themselves. It is also evident that the situation is not likely to improve in the near future, or at least until the market shows extensive positive growth. The motto seems to be: rather no business than bad business. And who can blame them?

Economic outlook and prospects for the housing market

The South African economy is forecast to contract by a real 1,9% in 2009, after growing by 3,1% in 2008. It will be the first recession in the South African economy since 1992, when real gross domestic product contracted by 2,1%. The current economic conditions are having a devastating effect on employment in many sectors of the economy, negatively impacting household income. With headline consumer price inflation expected to reach the 6% level by mid- 2010 only, the Reserve Bank’s Monetary Policy Committee is forecast to leave the repo rate unchanged for the rest of 2009 and into 2010. Banks’ prime lending and variable mortgage interest rates are thus projected to remain stable at the current level of 11% during this period. Nominal house price deflation is set to continue for the rest of 2009, starting to slow down towards the end of the year. This will be the second consecutive year of lower real house prices. The lagged effect of lower interest rates and a moderate recovery in the economy later this year are factors which will contribute to an expected gradual improvement in residential property market conditions in 2010.

Please note that the information provided does not constitute expert legal or financial advice. You should consult a professional legal or financial adviser for expert advice. We have mentioned the National Credit Act. The Act contains many sections and details that have not been mentioned. There may be other legislation that is also applicable. For more information on other legislation and the Act, you should consult a legal professional.

Selling your home can be as stressful as buying a new one. There are two options: selling privately or with the assistance of a competent estate agent.

For more information regarding estate agents and their rights and obligations, feel free to visit the Estate Agency Affairs Board website at:

www.eaab.org.za or 011 731 5600.

Asking the right price is certainly the most important aspect of selling your home. Overprice it and the chances are you will delay the sale; underprice it and you will regret selling too cheaply. Most buyer interest occurs when your property initially goes on the market. Current economic and market conditions, the location and size of the property, the accommodation and the features that the property offers, normally determines the actual selling price. You will get a good idea of the correct price by looking at what similar properties are fetching in your area. Do not be misled by the asking prices in the area. Remember that the seller usually sets the price; the buyer usually sets the value! Make sure that your price includes all the extras, such as fixtures and fittings.

Electrical compliance certificates

By law, every new purchaser of a property has to be in possession of an electrical compliance certificate confirming that the property’s electrical system complies with safety regulations. The seller is obliged to supply it to the buyer at the seller’s expense prior to registration of transfer. It is not the agent’s responsibility to obtain it. In certain areas (mainly coastal regions) the seller also has to supply the buyer with an Entomologist’s Certificate confirming that the property is free of woodborer or termite infestation.

Remember:

Complete all your documents in full. Do not sign any incomplete documents. Question anything that you do not understand fully – you have the right to do that.

Ensure that you do not sign documents that you have not fully completed where required.

ISSUE 9 SUTRA™

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