The amount that people are paying to service their debt has risen to an all-time high of 80% of disposable income, according to figures recently released by the South African Reserve Bank.
Ian Watson, MD of Bond Busters, attributes much of this to the lengthy introduction of the National Credit Act (NCA).
“Lending and credit institutions had so much warning that the Act was coming that they almost threw credit at people, who gladly accepted it, not understanding the implications for them. When the NCA came out, it shut the gate on easy credit, and people found they could no longer finance themselves on credit any more.
“Before the NCA, they could have consolidated their short-term debt into a long-term mortgage bond — now it’s possibly too late,” says Watson.
Bond Busters assists its clients with debt management, and Watson says in many cases it can get a debt consolidation approved — with conditions.
According to Allister Long, MD of Powerhouse Financial Services, as some wealthier people are certainly less affected, this means that for many people the percentage of disposable income needed to service debt is more than 100%.
“If we start digging deeper into these figures, we find that people in the lower LSM [living standards measure] brackets are in dire financial difficulty, and as their debt increases every month the situation could begin to spiral out of control,” he says.
The June 1 2007 introduction of the NCA has introduced a considerable switch in the way credit managers look at affordability. This has brought about a change in buying patterns, with the lower end as well as the upper end benefiting, and the middle market experiencing the biggest contraction.
One result is that, whereas nine out of 10 bond applications were approved pre-NCA, the experience at Powerhouse is that today only three to four applications out of 10 are approved.
According to Melanie David, a director and attorney at Powerhouse, whereas credit managers previously simply looked at whether you could afford 30% of your gross income, today they look at the difference between your income and expenditure.
“If you have very little disposable income, chances are you will not qualify now, whereas you would have in the past. At the same time, high income earners with greater disposable income qualify for more than the traditional 30% — and many of them are buying up,” she says.
The two major reasons for the current squeeze are the increases in interest rates, combined with the implementation of the NCA.
“There is nothing wrong with the Act itself, but because of the potential consequences of being found a ‘reckless lender’ companies have been over-cautious in their process of implementation, while trying to understand the risks of over-lending,” says Long.
“We’re only 12 months into the implementation, and it may take another six to 12 months before everything settles down,” he adds.
The penalties for being found a reckless lender are heavy: in addition to a fine, the lender may be required to write off the loan with no right of legal recourse against the customer.
As a result, says David, the housing market has “definitely slowed” and there are a lot more rejections of bond applications. Things are improving as credit managers become more attuned to the new dispensation: whereas only 35% of applications are approved today.
Estate agents have a new role to play too, says David: “Your estate agent should not take you to view a R1-million house if she knows you can only afford R800 000.”
Growth to slow further
Growth in mortgage advances, which exploded at the height of the housing boom, is gradually declining. The latest Reserve Bank figures show mortgage advances grew 24,1% year-on-year in December from 24,8% in November. This brought the total amount of mortgage advances to R849,8-billion in December, 1,4% lower than the previous month.
Norman Keel, sales manager at the Ultimate Bond Company, says the slowdown in year-on-year growth in mortgage advances, since peaking at 30,9% in October 2006, can be ascribed to higher interest rates since mid-2006, as well as the impact of the National Credit Act on credit extension, including mortgage advances.
Keel says the 16-month downward trend in mortgage advances is expected to continue. Absa economist Jacques du Toit says: “Factors such as the slower pace of economic expansion, lower growth in real household disposable income, and a slowing housing market this year are all set to contribute to year-on-year mortgage advances growth of around 18% by the end of this year.”
The Ultimate Bond Company has a focus on new property developments, and Keel says the slowdown is evident in this niche.
“We’re concerned that a lot of developments are being stopped, often because of infrastructure backlogs. If this trend continues, the inevitable consequence will be that prices, instead of softening as they should in such a market, will in fact rise, with affordability becoming an issue,” says Keel.
People are already paying 30% more on their bonds than they were two years ago, and rising unit prices on top of this will have a negative impact on the housing market.
“Prices should go negative in an environment of high interest rates, but the reduction in new developments is putting pressure right back on house prices,” he says.
There were concerns that too many new developments were under way, but Keel disagrees, claiming the number of new developments was not even keeping pace with population growth.
“The market that’s vibrant at the moment is the R500 000-to-R850 000 market. These continue to sell well. At the higher end of the market, there is pressure and this is down about 30%,” adds Keel.
In this market, the revenue of bond originators is coming under pressure, and Keel believes those bond originators that rely on a single contract may struggle, because they often cut their margin to service that one key account.