Headlines showing a 13,2% fall in house prices combined with 400% increases in the number of house repossessions are enough to send panic through the market. But these numbers are misleading, creating an uglier picture than is necessarily the case.
Although the Standard Bank Property Gauge shows the median house price fell 13,2% in May year on year, Standard Bank property economist Sizwe Nxedlana says there were technical reasons why prices fell so dramatically.
A year ago estate agents, buyers, sellers and banks all pushed to process loans for higher-valued properties before the National Credit Act came into effect in June 2007. As a result, the median house price rose substantially simply because houses with higher values made up the bulk of property transfers taking place. The basket of houses transferred in May last year looked very different to the basket of houses this year.
In addition, says Nxedlana, affordability issues have meant that more people are buying homes in the lower price range and the basket of houses has changed overall with a greater percentage in the lower price range than previously. This is not the same thing as the same house selling for 13,2% less than a year ago.
Nxedlana says this technical distortion will take another two months to work through the system, so July property figures will give a more accurate idea of how much property prices have declined.
On a five-month moving average, property prices have declined 5,5%. There was a dramatic decline in mortgage advances, peaking at R40-billion in May last year and falling to R19-billion in December. This suggests there are less buyers out there, but what the effect on house prices will be is yet to be seen.
House repossession numbers have risen but are coming off such a low base that the numbers remain insignificant. Michael Jordaan, CEO of FNB, says the bank, which has about 130 000 home loans, has less than 100 houses in repossession. But bad debts on the home loan book have doubled from 0,44% for the first six months of the year to 0,9% for the full year. Jordaan says these non-performing loans will not necessarily translate into repossessions. It is in the bank’s interest to assist homeowners to hold on to their houses through restructuring of debt. He says customers who call for assistance will find the bank willing to help them.
Standard Bank economist Goolam Ballim says it is not in the bank’s interest to repossess homes as there is a substantial cost to holding property stock, including maintenance and administration. It is more cost effective for the bank to restructure the debt. Ballim says banks can offer more flexibility and financial ingenuity and can restructure the debt for stressed homeowners.
Unlike in the United Kingdom and United States, where home loans are typically calculated over a 30-year period, South African banks structure loans over 20 years. Now that homeowners are under pressure, the banks can extend the term of the loan, thereby reducing the monthly repayments. For example, on a R1-million home loan, payments would be about R12 000 a month at prime less 1,5% (13,5%). If interest rates increase by a further 100 basis points and the loan is extended to 30 years, the monthly repayment would remain R12 000, helping the homeowner to absorb the rate hike.
Ballim says banks are also offering lower monthly payments with a balloon payment at the end of the period. Jordaan says FNB has introduced interest-only home loan repayment structures.
Banks themselves are not yet faced with a crisis in terms of their asset base. The average loan to value for most banks is between 65% and 70%. In other words, their outstanding loans are only 70% of the value of the properties they hold as collateral. Although the prime lending rate was between 10,5% and 12,5% when about half of the mortgages were advanced, property prices have risen about 20% since then.
Homeowners, although stretched on monthly repayments, have already built up equity in their homes, making them less likely to default, unlike in the US where many homeowners are sitting in a negative equity situation.
But bad debt provisions have risen sharply. Ballim says these are now in line with the long-term trend. In the past few years one could have argued that banks were not taking enough risk as the percentage of non-performing loans was well below average as a result of the increase in salaries and lower interest rates. This has given banks some room to breathe during this credit crisis. While we should not be panicking right now, the tough times are still ahead. Higher interest rates, which are expected to remain until at least the second half of next year, will eventually start to take their toll on consumers.
Kevin Lings, economist at Stanlib, says history shows that the real fallout usually occurs at the end of an upward rate cycle, just as rates are beginning to fall. Consumers have the ability to hold on for a while as they cut down on discretionary spending and dip into savings. But a time will come when the debts eventually will break the consumer.
Jordaan says the number of calls from debt-distressed consumers has increased dramatically and FNB has added staff to its call centre to assist customers. The tough times are nowhere near over — the next year is going to get far tougher and the headlines will become more distressing.