Even before it drew to a close the denizens of social media had crowned 2016 the “#WorstYearEver”. Not known for their aversion to hyperbole one must take this declaration with a sizeable pinch of salt. That being said it certainly isn’t in contention for the title of ‘Best Year Ever’ either!
War, famine, disease and drought routinely made headlines and were felt by most people, albeit indirectly. The shock results of the Brexit vote and the US election also evoked mostly negative emotions (from the winning and the losing sides) though I would suggest that we will need to wait years before we can determine the true impact of these results.
Locally the economy remained stagnant, our government continued to underperform and inflation ate into the buying power of those lucky enough to have an income. No, 2016 was not a great year.
De Mink Property Finance in 2016
Despite the general negativity and the great many challenges we faced, De Mink Property Finance was again able to make modest gains in both the number of bonds approved and the total value of those bonds. It should be noted that the improvement in value was certainly helped by continued housing price inflation in the Western Cape but happily this inflation does not account for the entire increase year-on-year.
2016 is also the year that De Mink Property Finance Consultants transitioned from a Sole Proprietorship, in our owner Liz de Mink’s name, to a private company. We’ve already seen some benefits derived from operating cost reduction and improved efficiency and in the long term we believe this change of structure will help to ensure continuity of the brand and exploit any growth opportunities present in the years to come.
A year in review
What follows is a brief analysis of the data generated this year with a focus on the home loans used specifically to purchase properties (as oppose to further loans on bonded property, new loans on unbonded property or building loans) granted via the De Mink Property Finance channel. Please note that 95% of these purchases were made in the Cape Town City Metropole.
Top tips from 2016
The banks have little to no idea of how to assess a free-lance worker’s income or creditworthiness. Despite global trends that suggest free-lance workers will become a sizeable portion of the workforce banks continue to treat these clients as self-employed. It takes a specialist, like De Mink Property Finance, to prove to the bank that a free-lance is a desirable client, capable of affording a home loan.
Save up for a deposit: your application is more likely to be approved (and at a better interest rate) if you contribute some of your own money.
Keep up a good credit history: maintain a good relationship with your bank and don’t forget to pay your debts (read more here)!
Don’t always expect your current bank to be the best: competition is important and you’ll get the best deals if you shop around. This is true for home loans too!
BUT if you’re planning on buying a home and applying for a home loan keep your accounts at your current bank. Banks factor in the length and quality of a relationship with a client into their rate offers.
Average home price & average loan amount
The average purchase price of property was R1 866 234. This represents a 13.63% increase in the average purchase price from last year.
The average home loan granted was R1 236 432. This represents a 6.95% increase in the home loan amount applied for and approved from last year.
What can we learn from this?
While property prices in 2016 started to flatten out across most other areas of South Africa, Cape Town (and the City Bowl in particular) has continued to see double digit price increases. We are cautious in our assessment for the future as we believe some areas are now reaching the limit of what people can afford or are willing to spend but inflation beating returns can and will still be achieved in the medium and long term.
The extent of these returns will be increasingly dependent on the areas in which you invest. Schools, proximity to employment, safety and even the “vibe” must be taken into account. If you’re buying as medium (or short) term investment: Do your research!
Loan to Value (LTV)
On average the LTV (which is the percentage of the purchase price of the property granted as a loan) was 72.13%. This figure is down from last year’s average LTV of 75.85% and, surprisingly, is also slightly down from 2015’s average of 73%!
The LTV in recent years is still comparatively low when compared to just before the Great Recession which saw an explosion in mortgage lending in South Africa (and globally). Clearly the message has started to sink in: banks remain wary of 100% LTV loans though 2016 saw greater lending at this level to first time buyers.
What can we learn from this?
Home loans of 80% – 90% LTV remain the norm but the banks still price for risk and charge increased interest rates at this level.
If you’re thinking about buying property, and need a home loan to do so, you would be wise to start saving up for a deposit of at least 10% of the purchase price.
As a general rule the more of your own money you contribute to the purchase the better the interest rate you will receive from the bank fronting the rest. This decrease in interest rate also increases the likelihood that you will actually qualify for the loan (as it creates a more favourable affordability calculation).
When saving and planning do not forget about the costs associated with buying a property and securing a home loan (link here).
Now let’s see what info we can draw out of our data with regards to interest rates…
Prime lending and interest rate concessions:
The South African Reserve Bank (SARB) increased the repo-rate (repurchase rate) twice in 2016: by 0.5% at the end of January and again by 0.25% in mid-March. The SARB repo-rate currently stands at 7%. The repo-rate acts as a control over the money supply and is the most obvious tool the SARB has to exert influence (albeit indirectly) over the economy and it represents the rate at which commercial banks repay their loans to the SARB.
Despite these two increases credit remains relatively cheap in South Africa as compared to other emerging economies. Unfortunately the banks (and other lenders) charge premiums on their loans and these premiums do not vary much from lender to lender.
This premium is called the prime lending rate. Despite this uniformity different banks have different strategies and appetites for particular forms of risk and from time to time will offer ‘generous’ terms to certain clients who match their, at times, mystifying criteria. These ‘generous’ terms are called “rate concessions” and may be below or above the lending rate.
Now let’s take a look at what average concessions looked like in 2016:
With increases that saw prime go from 9.75% at the start of the quarter and finish at 10.5% the average rate concession received was 0.08% below prime.
With prime at 10.5% the average concession received was 0.19% above prime. Not particularly generous!
With prime at 10.5% the average concession received was 0.24% above prime. Not much of a concession really.
With prime at 10.5% the average concession received was 012.% above prime. Again no help to struggling home owners.
The average rate ‘concession’ for the period was 0.12%. That means that on average applicants were paying an additional 0.12% on their home loans which represents a significant increase from last year when the average concession was 0.18% BELOW prime.
What can we learn from these figures?
Uncertainty and risk dramatically increased at the end of 2015 and continued well into 2016: I’m sure you’ve heard of Nenegate, the Nkandla report, Downgrades and let’s not forget about the State Capture report. Oh and the banks and markets were also rattled by the Brexit vote and US General elections. These factors all impacted pricing of lending generally and home loans in particular.
I doubt the calendar will be quite as full this year but many of the same risk factors remain unresolved. This means that 2017 is unlikely to be a good year for favourable rate concessions but good, low risk clients will still be rewarded.
Banks Market Share from the De Mink Property Finance channel:
As mortgage originators we approach all possible banks on behalf of our clients, present their application in the best possible way and then encourage (fight with) the banks to give our clients the best possible deals. In the end it is up to the client to decide which bank they will choose to do business with.
In 2016 the majority of our clients once again decided to accept offers from Standard Bank. Their 60% share last year represents a massive 18 percentage point increase from 2015. This is thanks to some aggressive and competitive offers made to high quality clients: of the 10 best rate concessions offered to our clients this year Standard Bank occupies positions 1 through 6. It should also be noted that in several instances Standard Bank was the only institution willing to make an offer to the client.
This aggressive strategy saw all other banks losing ground: ABSA is down by 9 percentage points to 16%, FNB was down by 2 points to 19%. Even Nedbank, now in its second year of having reopened its books to non-Nedbank clients, saw a decline from 8% to 5% year on year.
Unlike previous years none of the smaller lenders featured and the big four completely dominated home loans from the De Mink Property Finance channel.
Happy New Year!
Property remains among the best long term investments available and a home loan is often the best way to break into the market.
We hope that this article and our blog have been of some help to you throughout this busy year. Be sure to check in again soon as our of next article will have our predictions for 2017. And as always if you have any questions or need any assistance please contact us!
We wish you a prosperous and happy 2017!