Not all doom and gloom for first-time home buyers

Despite the economy slowing down and high interest rates, South Africa’s first-time home buyers stand a better chance of having their home loans approved than their American and British counterparts.

And, while local lending conditions have become stricter, lenders are willing to negotiate on interest rates. First-time buyers should leap at the chance to get on to the property ladder as this is the cheapest property has been in a decade and the consensus of economists now appears to be that we are at the top of the current interest-rate cycle.

Simon Stockley, CEO of Integer Home Loans, says: “Although the property market in South Africa has been rattled by the effects of an ailing global and domestic economy, the local market is still relatively easy to enter.

“First-time buyers in South Africa seem to have been held back by high interest rates and the requirements of the National Credit Act rather than the lack of availability for home loans experienced by first time buyers in the UK and US.”

The United Kingdom has seen the steepest decline in home-loan approvals in a decade. In 1997, 37% of mortgages went to first-time buyers but by January 2008 the figure stood at a meagre 13%.

The British government (in stark contrast to South Africa) has moved aggressively to stabilise and boost the sector with a raft of packages designed to stimulate the market, particularly focusing on first-time buyers.

The extent of the crisis in the United States is emphasised by the announcement over the weekend by the US government that it will be taking control of Freddie Mae and Fannie Mac with the purchase of $100-billion of preferred stock in both institutions.

Stockley says: “There is a general consensus that the market is turning and the crisis is nowhere as pronounced in South Africa. As a result, there is a growing sense of confidence by both consumers and economists that we have reached the top of the interest-rate cycle and that there are signs of market recovery, while there has been signs of slowdown in prices. This represents the ideal opportunity for first-time buyers to get into market and they should be exploiting that.”

Now more than ever, first-time buyers need to step into the property market because prices are significantly lower than they were about two years ago.

In June 2008, house prices dropped by 7,3% — this is on the back of earlier declines from the beginning of the year. First-time buyers who have enough capital must just bite the bullet and enter the market. When the economy recovers, prices might shoot up due to a demand.

“The average house price has declined to just over R950 000, from about R1-million in early 2007. Although buyers might pay higher instalments, the figures are projected to decline when the economy begins to recover at the end of 2009. Interest rates are expected to drop to 14% by the end of next year and a further drop to 12,5% is expected going into 2010,” says Stockley.

In the UK it has become near impossible for the average first-time home buyer to secure a home loan. An entry-level house costs about £200 000, which requires an annual salary of £60 000 and a 10% deposit amounting to £20 000. In the US, a married couple with a combined annual income of about $70 000 do not qualify for a $500 000 townhouse.

Stockley attributes the woes of the overseas property market to the subprime lending crisis, which granted mortgages to people who could not afford repayments. He says: “In the US, California has been the hardest-hit state; about 180 000 homes will be repossessed. This is from 826 900 subprime loans carried in 2005 and 2006 alone.”

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