Property in the current economic climate
A diminished economy
The international pandemic has hit the world and South African economy hard. Finance Minister Tito Mboweni has expressed his expectation for the economy to decline by as much as 6.4%. No-one knows exactly what the long-term effects of the pandemic will be on our economy and no-one can tell us exactly what the recovery from it will look like. There are various scenarios, from the most optimistic in which the economy recovers within a year to its pre-Covid trajectory, to the bleakest in which there is a return to pre-Covid growth rates but a very slow recovery to the 2019 GDP levels and only after an interim of a two-year recession. Some industries, like aviation, tourism, leisure, and lesser so retailing, have been heavily hit with unemployment numbers set to skyrocket to over 35%, a new high in South Africa. How do all of these factors potentially influence the property market and housing trends?
According to real estate experts, the housing market in the under-R2 million price range will remain very lively as long as interest rates remain at current levels. The buyer profile in this price range is not restricted to a single demographic. There are first-time buyers who take advantage of current market conditions, and there are buyers in the older age demographic in need of downsizing. Downsizing might not have been on the cards for these buyers just yet, but since market conditions are probably better suited for them now than in a few years, they may decide to embrace the opportunity earlier than anticipated.
Although one may even find investment buyers in this price range, investing in real estate as a second or third property at the moment will only be a feasible option if the buyer is affluent in this time of uncertainty and secure enough that they are not at risk of losing income. The current economic climate poses the opportunity to find alluring properties in this market segment since there are many re-possessed properties priced at well below the actual market value.
The next price bracket of up to R5 million is less lively. Bonds are not given easily to buyers in this range. The profile of buyers in this range are individuals that have the means and are also at low risk of losing income. They include buyers with a positive outlook on a changing work situation where they are now facing long-term to permanent remote working conditions. Since working from a home office becomes the new normal for some, the need arises for a dedicated at-home working space, and this may be the strongest drive for the need for a bigger, more suitable property.
Bonds and Rates
The repo rate has been cut to its lowest in many years in an attempt to safeguard against a complete economic catastrophe and in support of lenders and borrowers. Homeowners with bonds benefited greatly by the lower interest rate and it encouraged first-time buyers to enter the property market. With this being said, one should not be so short-sighted as to believe this is a long-term scenario. Interest rates will rise again. Considering this, the challenge lies not in weathering the current economic climate but being in a position of keeping your property even if and when rates increase.
Although first-time buyers take advantage of the lower rates, it is not necessarily an adequately persuasive reason to invest in a second property however tempting it may be. One of the reasons for people’s reluctance to invest in a second property is the drop in bond approvals from banks. In this time of uncertainty and with an expectation of large-scale retrenchments, banks are reluctant to approve a second bond to buyers, especially when the second bond repayment will rely heavily on rental income from that property.
Another appealing factor that may tip the scale for first-time buyers is the government’s subsidy program for first-time buyers in the lower-income group. Naturally, terms and conditions apply. This is a once-off subsidy that can considerably lower the cost of owning a home for the first time.
Banks offering their clients home loans may each request their own documents to be completed or submitted when applying for a new home loan. There are however general rules, steps, calculations, documents, and procedures all banks have to adhere to when clients apply for a loan.
In order for the bank to approve a loan or supply the client with a pre-qualified quote, they have to assess affordability, check the credit record, and value the property the client is interested in buying or can afford in case of pre-qualification. Assessing affordability requires proof of income since only a certain percentage of a net income should be allocated for accommodation/housing. A record with the credit bureau may either disqualify an applicant or have other restrictions, rules, or terms and conditions. The bank may handle each application on a case-by-case basis with strict rules as a foundation. The value of the property will impact the amount the bank is willing to lend the client for that particular property irrespective of the selling/asking price.
Documents to also be submitted are an identity document, a tax clearance certificate and proof of income. By failing to submit, the bank cannot approve a loan.
What does it mean for the individual?
Your current financial, renting, or house ownership situation will greatly affect the choices you make in your journey to renting or owning a home. It is advised to not only look at the current state of affairs but to also consider how and when current situations may change.
If you are renting at the moment, it can be advantageous for you to look at buying sooner rather than later, for example. Using the services of a qualified agency is still the best option as we wade our way through the troubled and uncertain waters caused by Covid-19.