Has the property market become more affordable for first-time home buyers?

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Planning on buying a property? A leading bank believes that homes for first-time buyers are more affordable, relative to income levels, than they were ten years ago. Regardless of the different views on house price growth, the bottom line is that you need a bigger deposit and the bad news is that it’s likely to take you longer to save for a deposit than it would have just three years ago.

Standard Bank recently released a study showing that over the last ten years, the affordability factor around buying a home for first-time buyers has improved, as a result of the average income growing at a faster rate than that of house prices, combined with a low interest rate environment. “With house prices lagging income and interest rates remaining low, thus anchoring the cost of a mortgage, the average first-time buyer is in a relatively better position to acquire and pay for their home than they were a decade ago,” says Standard Bank economist, Siphamandla Mkhwanazi.

The study, which was based on Standard Bank’s mortgage applications data over the last ten years, shows that the median income for the first-time home buyer grew 92%, from R15 000 a month in the first quarter of 2006 to R29 000 a month in the first quarter of this year. The median first-time instalment grew 81% from R3 510 a month in the first quarter of 2006 to R6 345 in the first quarter of this year.

However, the different property experts have varying figures when it comes to house price growth – figures based on their individual data records. Shaun Rademeyer, chief executive of mortgage originator, BetterLife Home Loans, says in the first-time-buyer sector of the market, continued strong demand is indicated by a 6,2% increase in the average home price in the year to end-June, compared to a 3,8% increase in the previous 12 months. “In addition, first-time-buyers continue to account for 46% of all home loan applications, and almost a third of all home loan approvals,” he says.

Kay Geldenhuys, property finance processing manager at mortgage originator, ooba says their data shows that the average purchase price for first-time home buyers has shown a year-on-year growth of 4.3% for the period from 01 July 2015 to 30 June 2016.

First National Bank’s property strategist, John Loos, says national average house price inflation rate for the 12 months up until June this year was 7.4%. “Based on our average house price inflation rate, and the way interest rates have risen over the past 12 months, the instalment payment on the average priced home has risen by 14.4% year-on-year for June,” he says. Dawid Malan, head of strategic stakeholder engagements at Absa Home Loans says price growth in the first six months of 2016 for small-sized homes (80m²-140m²) was 9,2% on a year-on-year basis.

How much can you borrow?

Geldenhuys says that while the banks do not have specific loan-to-value ratios for first-time home buyers, there are two banks in the market who may consider lending up to 105% home loans to qualified first-time buyers in the affordable lending segment. She says the opportunities are available for first-time buyers with no deposit to access 100% home loans, but adds that banks are extremely cautious with approving loans where the buyer has no equity in the property.

Geldenhuys says the qualifying criteria for 100% bonds would include the following:

  • An impeccably good credit record with a track record of repaying existing contractual debt responsibly is essential.
  • Your overall credit rating based on the specific’s bank’s assessment must be very good.
  • Being able to afford the monthly bond instalment is critical. The bank will ask you to demonstrate affordability should the interest rates increase and will ask you to demonstrate affordability for all future property-related expenses, such as rates/levies and homeowner’s cover insurance.
  • Banks will require proof of income and will also require you to provide them with an income and expenditure statement which indicates that once all contractual debt commitment and household expenses have been accounted for, there is sufficient net surplus income to afford the home loan instalment.
  • Another important criteria is that the property purchased is in good standing and is situated in a suburb where property prices show steady growth.

You can get a 100% home loan at Absa, depending on the quality of your application and the type of property you are buying. FNB offers home loans ranging from 90% to 105%, depending on your personal credit profile and your home loan application.

How much should you save towards a deposit?

Mkhwanazi says that the median first-time buyer needs to raise 1.7 months’ worth of disposable income to fund their first home. “The deposit index is currently rising due to slowing growth and rising interest rates but is still better than its peak of 3.2 months’ disposable income during the global financial crisis,” he says.

He says that it would take the median first-time buyer about 19 months to save a deposit equivalent to 1.7 months’ disposable income (as required currently). “This is due to first-time home buyers’ low savings capacity, aggravated by slowing economic growth. Comparatively, it would have taken 39 months during the global financial crisis, and just two months in the third quarter of 2013before SA entered the current downward phase of its business cycle,” he says.

Ideally, you should work towards saving a minimum deposit of 10% towards your home loan. Rademeyer says the first-time home buyer segment has seen cash deposit requirements rise from an average of 11% to an average of 12% in the past 12 months. If you are currently renting a good strategy is to save the difference between your current rent and what it will cost you each month as a homeowner – this would include your bond repayments, insurance, rates and levies. This will also help you to prove affordability when you do apply for a home loan from the bank. Don’t forget to take into account the cost of your bond registration and property transfer duties.

Sidebar: Tips for a first-time home buyer

We rounded up a wealth of important advice from the experts, specifically for buyers entering the property market for the first time.

  • Keep track of your expenses and understand what loan you would qualify for before entering into the home buying process.
  • The health of your credit history is extremely important when applying for any sort of credit facility; more especially a mortgage loan because of the long-term commitment of the agreement. It is therefore important to ensure that your credit record is in good standing and that all credit accounts are managed responsibly as credit providers adhere diligently to the guidelines of the National Credit Act. The better your credit history, the better likelihood of a favourable loan to value and price
  • Being a long-term credit commitment, you are almost guaranteed to get preferential terms on your mortgage loan agreement if you have saved money and you can present a large deposit.
  • Buy within your means. If your income levels fluctuate, be realistic of what you can afford, especially in those months when your higher income does not materialise. Prepare a detailed budget, review your bank statements and consider all your expenses, however big or small.
  • Bank and mortgage originator websites have tools available that can help you calculate the size of the loan you can afford. Make use of these tools before you approach a bank. Albertus van Staden, head of credit at FNB Housing Finance, says you should not be disappointed if the loan you qualify for is less than you expected. “This is to ensure that you can comfortably afford a home loan and avoid getting into financial difficulty later in life,” he says.
  • Owning a home means extra expenses. The bond is not the only expense that comes with owning a house. “Once you have successfully bought your house, you will need to be pragmatic about expenses such as furnishing your home. It is not wise to take out credit to furnish your new home. You will need to do this incrementally so that you can keep up with your bond repayments and all the additional costs related to your home,” cautions Van Staden. Other expenses that will need to be considered and budgeted for include municipality rates, taxes, insurances and levies.
  • When purchasing your home it is important to note the different types of properties and how they will affect your finances once you are a home owner. For example when you purchase a sectional title you are buying a unit in a complex or a development. “Sectional titles are considered a more affordable option; because you would pay a fee often referred to as levies that goes towards covering your home insurance and the general maintenance of the common property for the whole complex. However this is different for someone that chooses to purchase a free hold property, which is a free standing or a cluster house, as they would have to maintain their property themselves” explains Van Staden.
  • Sectional title properties have additional rules that you need to be aware of before you sign a purchase agreement. “If you want to renovate your home, often sectional titles have restrictions to what homeowners can do to their homes and they have to abide by the rules of the governing body of the complex. This is not always the case for a free hold property, bear in mind that some residential estates also have limitations on what can be done on free hold properties” adds Van Staden.
  • Think carefully about buying vs renting. If you believe that there is a good chance of you uprooting and relocating within the next few years, for jobs or other reasons, renting may be better, because the transfer and bond registration costs are high.
  • Buy at a level where you can comfortably afford a few percentage points worth of interest rate hikes. Even though the economists don’t expect too much further rate hiking, the future remains an uncertain place and predictions can be wrong. When you work out what you can afford, make sure you can still afford the home loan instalments if the interest rate rises by three to four per cent.
  • Understand your daily transport costs assuming you are a commuter (and work on AA rates, not just petrol costs). You may be able to buy a cheaper home far away from where you work, but it may or may not cost you more than buying in an area that is well located relative to work for a higher price. Commuting costs aren’t only financial. They also come in the form of stress and time wasted. Think about it. A location close to good public transport will be more of a plus point for your property value as time goes by, as will safe open recreation space.

Sidebar: New agents on the block

Property Fox is a relatively new entrant on the property scene. Co-founders, Crispin Inglis and Ashley James are disrupting the market with a model where you only pay 1.5% in agent’s commission, as opposed to the 4 to 7% traditional agent’s commission model. “We offer clients two options – they can either pay a 1.5% commission or a flat upfront fee of R25 000,” Inglis says.

He says that smaller estate agencies are able to cut estate agent’s commission as low as 4% but with smaller overheads and an online business model, PropertyFox is able to reduce this to 1.5%. This translated into a saving of R154 000 in agent’s commission for a Pinelands couple who recently sold their home for R2.8 million.

  • This article was first published in City Press on 24 July 2016.

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