With interest rates rising and the economy slowing, is now the time to make the biggest investment of your life?
There is one thing most economists agree on: our economy will continue to slow and we will see further interest rate hikes. Against this backdrop, property prices should typically weaken – higher interest rates mean fewer potential buyers and an increase in distressed sellers.
So a potential property buyer may be wondering whether to hold back and wait for property prices to weaken further. The more important consideration, however, is what financial commitment you can afford to make right now.
Will property be cheaper in a year’s time?
House price figures from Standard Bank, FNB and Absa all suggest that prices are still rising, albeit at a slower rate.
FNB Property economist John Loos says that while the bank projects average house price growth to lose further steam, slowing from 6% average in 2015 to 4.8% in 2016, and then to nearly 3% by 2018, it is still a growth rate in nominal terms.
If you take inflation into account, which is now at 7%, then house prices are expected to decline in real terms (after inflation) but this is what Loos refers to as a “soft landing” rather than a property crash.
Source: Lightstone property report March 2016
Loos has warned, however, that if South Africa enters a recession then house prices could fall more sharply. “It would likely lead to average house price deflation, a bad situation for mortgage lenders and borrowers alike, as it makes it challenging to “trade out” of properties without losses should a household be under financial pressure,” says Loos.
Based on current estimates, the banks are not expecting to see lower house prices but at the same time you do not need to rush to buy a property this year – prices are not expected to rise much further. Of course if we do enter a recession, all predictions go out the window.
Will we see an increase in distressed sellers?
During periods of slow economic growth and rising interest rates, we usually see an increase in the number of distressed sellers, which provides an opportunity for potential home owners to buy a property at a discount either through auction or an urgent sale.
Indications from the banks are that while customers are feeling financial pressure, at this stage they are still keeping their heads above water when it comes to mortgage repayments.
According to Ewald Kellerman, Head of Customer Interaction at Absa Home Loans, the bank has started to see an increase in the number of people struggling to meet repayments, however Kellerman says that at this stage “these customers are making arrangements to bring their accounts up to date within the short term, without leading to an increase in more formal applications for bond restructures.”
According to the National Credit Regulator, 91% of mortgage accounts are in good standing – in other words they have not fallen behind in repayments. Currently mortgage arrears of 90 days or more are at around 3.5% of total value of loans. These would be properties where legal action would most likely take place. FNB’s Loos expects this figure to increase slightly to around 3.7% of total value of loans this year, peaking at 4.8% in 2018. “This however is mild compared to the 6.2% peak of 2010 and to date we have not seen clear evidence in the mortgage sector of rising financial stress, only mounting financial constraints,” says Loos.
Another indicator of distressed selling is the FNB Estate Agent Survey which analyses the reasons for homeowners putting their houses on the market. The number of people selling due to financial pressure has not increased over the last two years, remaining at around 14% of total sellers.
The overall message is that current homeowners are facing financial pressure but it is not likely to become a stronger buyers’ market any time soon. It also means that if you do buy a home, it is unlikely to lose its value and you won’t end up owing more on it than it is worth. So the only reason to delay buying a property is your own financial situation.
Can I afford to buy?
If you are looking at buying a property you need to focus on making sure that you are in a strong financial position before doing so.
Reduce your short-term debt: According to Ian Wason, CEO of debt management company DebtBusters, they have seen an increase in the number of people with vehicle and home finance applying for debt review. The issue, however, is not necessarily due to mortgage repayments but levels of unsecured credit.
Wason says they are seeing a shift towards unsecured, more expensive debt and even higher income earning customers have around 37% of expensive unsecured debt relative to total debt. Wason says 35% of customers with payday loans also have car finance while 17% of them have a mortgage. While it is the short-term debt that is leading people into financial difficulty, it will unfortunately result in them being unable to meet their home repayments and ultimately losing their homes. Before you even think about buying a home, make sure you have cleared all your short-term debt first. It will also improve your credit rating and therefore the interest rate that you qualify for.
Build up a war chest: Given the current economic climate, banks are unlike to issue a mortgage without a significant deposit. There are also transaction and relocation costs in buying a home that you need to prepare for so that you don’t end up having to take on short-term debt. Aim to have at least 15% to 20% of the purchase value of the property in savings to meet these costs – under no circumstances should you buy a home if you have to take on short-term debt.
Stress test your budget: Draw up a budget to ensure that you understand all the costs associated with homeownership and that you can afford it. Homeownership costs such as levies, maintenance, rates and taxes, electricity and water can equal up to 50% of your mortgage repayments.
Build in a buffer: Kellerman says that Absa is expecting the prime interest rate to reach 11% by the end of 2016. Given the recent shock inflation figures, it is likely that rates could rise even further. Currently prime is at 10.5% so you need to ensure that you can afford future interest rate increases. The best way to bullet-proof your mortgage is to pay in an additional 10% each month on your current mortgage payment. This may mean that you have to buy a home for a bit less than you could afford at current interest rates, but this way you know you can afford to keep your home without undue financial stress. By paying in extra each month you also pay off your home loan over a shorter period of time, saving a significant amount of interest.
This article first appeared in City Press