Slower house-price growth, repeated interest-rate hikes and uncertainty about new credit laws and systems have contributed to a slowdown in home-loan applications. Bond originators, however, see their industry becoming increasingly important.
Six weeks after the introduction of the new National Credit Act (NCA) on June 1, its impact on the property market remains unclear.
The housing market has been tightening for some months now, although the average price of a house is now R924 800, according to Absa’s House Price Index. In June house prices grew 14,9% year-on-year in nominal terms, which does not take inflation into account. On a month-on-month basis, nominal price growth slowed to 0,6% in June. This is the slowest month-on-month growth since September 1999, when growth of 0,4% was recorded. Further moderation is expected in the remaining months of the year.
New business intake on homeloans has slowed significantly, banks admitted, in some cases by between 20% and 25%, although this is not necessarily due to the NCA.
Vehicle sales have been hit hard, too. June’s new vehicle sales declined 12,7%, compared with the same month last year, as rate hikes and fuel prices curbed spending. The National Association of Automobile Manufactureres of South Africa says higher car prices and the NCA have affected sales.
But experts are divided about how much impact the NCA — which forces lenders to assess affordability — has had. Previously, home-loan repayments could not exceed 30% of the borrower’s gross income, regardless of any other obligations, such as tax, school fees and other debt.
Now credit providers must assess applicants’ income, monthly financial commitments and prospects.
“My gut feel is that the effects of the NCA are exaggerated,” said John Loos, a property economist at First National Bank. He said the drop-off in home loan approvals could be due to several factors, including temporary administrative delays. Consumers turned down for loans would in many cases be able to re-apply for smaller amounts, while those who couldn’t, or who chose not to, would turn to the rental market. This in turn would give a “slight boost” to the buy-for-let market.
“It’s not going to change any trends, it will just reinforce what is already happening. The market has been slowing down, due to interest rate hikes, and demand has shifted to the lower end of the market, because of affordability,” he said.
Marlene Heymans, a researcher at the National Credit Regulator, which oversees the NCA’s implementation, says there is anecdotal evidence that some of the banks’ systems were not ready for the NCA by June 1, when the act was implemented. The perception was that consumers were refused credit when in fact the bank itself had not been ready to assess the applications.
Leon Barnard, the director of home loans, vehicle and asset finance for Standard Bank, says the bank has seen a marginal increase in the decline rate for home loans, which ticked up two percentage points from 35% to 37% since the NCA’s introduction. Because the new Act has coincided with a rate hike of 50 basis points, it is difficult to tell how much of the decline is due to the new legislation.
He says there is still buoyancy in the R400 000 to R800 000 market segment, where demand is seen from emerging-market buyers. At the same time “a lot of developers are holding back”, he says, concerned that they will not be able to sell in the present market.
But bond originators say they expect their industry to become more important in the wake of the NCA. Ian Wason of BondBusters says he expects pre-approvals for home loan and asset finance to become much more important. Sellers will start to demand that buyers are pre-approved for finance, as home-loan applications take longer to process.
“Before, you could almost pre-approve yourself. Now you’ve got to go to a mortgage broker, who can do the calculations for you and fill in an application form,” he says.
Buyers must approach bond originators three months before they intend to purchase to pay debt and squash expenses. This will affect the size of the mortgage to be granted.
MortgageSA’s chief executive, Saul Geffen, echoes Wason’s comments. “It’s now more important for buyers to get pre-qualified to find out if they qualify for home finance and for how much. This will give them certainty in knowing what they can afford and give sellers a greater deal of confidence in accepting an offer.”
He says the new legislation means that consumers need greater advice and better guidance to meet the more demanding application requirements for home loans. “This means an even bigger role for originators to advise people to ensure they will meet the new requirements and to shop around the banks for the best deal.”
“In fact, with two major banks we have seen decline rates actually drop since the NCA came into being, meaning many more people are getting approved now.”
“If bond originators seize on the opportunity, good luck to them,” Loos said, remarking that there was certainly an opportunity to provide coaching on debt management.
Louis Malherbe, Nedbank’s spokesperson on the NCA and home loans, said although Nedbank would educate clients on home loan products, it would not offer training on general financial management.
Wason says his company has seen inquiries doubling for debt consolidation since the Act’s implementation. “Prior to the NCA the cheapest form of debt was to increase your home loan, but it was much easier to get a new credit card.” Since June 1, highly geared consumers have found it increasingly difficult to get other forms of credit, so they are forced to consolidate.
Wason says the savings can be huge as the interest rate on a home loan product is usually far less than on other credit products. “The downside is that they are moving their debts into a 20-year period, but they haven’t got a choice. By doing this, they can afford to live,” he says.