SA’s biggest mortgage originators have seen a sharp recovery in home loan applications in June, with buyers no doubt scrambling to cash in on cheap borrowing costs and softer house prices.
Home loan application volumes submitted to the banks via ooba are up a hefty 25% year on year since the beginning of June, when real estate agents were allowed to trade again under lockdown level 3. June volumes are also 27% ahead of March’s pre-Covid levels, says Kay Geldenhuys, head of sales fulfilment at ooba.
She attributes this to a combination of pent-up demand — the deeds office was closed for most of the previous two months — together with buyers taking advantage of the lowest interest rates in decades. Since early January, banks’ prime lending rate has dropped from 10% to 7.25% following a series of rate cuts, bringing prime to its lowest level in almost 50 years.
Geldenhuys believes the expectation of additional rate cuts in the second half of the year has further spurred first-time homebuyers and buy-to-let investors to enter the market.
One of the upshots of lower interest rates — besides lower monthly loan repayments — is that prospective buyers can qualify for a much larger mortgage. That’s especially important for first-time buyers, who often struggle to get a foot on the property ladder. For instance, a household with a gross monthly income of R25,000 would have qualified for a home loan of about R777,000 in early January, when prime was at 10%. The same family now qualifies for an additional R172,000 (at prime of 7.25%, assuming a 100% loan repaid over 20 years).
Rival mortgage originator BetterBond reports a similar uptick in activity. In the second week of June, it processed 30% more home loan applications on a year-on-year basis. Volumes for the first half of June rose an overall 12%.
BetterBond CEO Carl Coetzee says the rebound suggests initial predictions of the pandemic pushing the already struggling housing market into a deep and prolonged recession may have been overly negative.
He says if June application trends continue over the next few weeks, a "substantial" recovery in the residential property market could be on the cards sooner than expected.
Coetzee refers to other statistics that point to a tentative rebound in housing activity. The average loan size granted by the banks in the year to June increased 3.45% year on year, from R946,100 to R978,750. At the same time, he says, the average purchase price rose 0.31%, from R1,153,499 to R1,157,110.
"Again, this suggests that house prices have held steady, despite the lockdown restrictions, which suppressed market activity for several weeks," he says.
hough application volumes may be up substantially, the key question is how eager banks will be to approve loans over the coming months, given uncertainty about the pandemic’s effect on unemployment and households’ ability to repay their debt. The issue is particularly relevant in light of the Banking Association SA’s latest estimate that more than R300bn on banks’ loan books is reportedly at risk of default, with mortgage loans accounting for 59% of that.
Geldenhuys concedes that banks are adopting more cautious lending practices. However, she says ooba’s June approval rates are trending only five percentage points lower than pre-Covid levels, which were at a 12-year high of 83% in the first quarter. That means 78% of homebuyers who applied for finance through ooba in June still secured a loan.
But banks may be inclined to increase their cash deposit requirements, which stood at just less than 10% of the purchase price in the first quarter, according to ooba’s figures.
Residential property and its design become arguably more important now, assuming that the remote working trend accelerates
— John Loos
Geldenhuys says: "We are cautiously optimistic that the banks will continue lending, albeit a lot more prudently at the higher loan-to-value levels."
Industry players will no doubt keep a close watch on mortgage lending patterns to see if earlier expectations of a sharp fall in housing sales can be averted. In early May, Prof Francois Viruly, from the University of Cape Town’s Urban Real Estate Research Unit, estimated that, year on year, housing sales could drop by as much as 45% in 2020.
However, FNB economist and property strategist John Loos believes residential property is the one subsector of the broader SA property market that is least at risk of a pandemic-induced crash. In fact, he cites the rise in remote working and people spending more time in their homes as factors that could support housing activity.
"This is not to say we don’t expect some noticeable price deflation in the residential market this year. But we all need to stay somewhere. In fact, residential property and its design become arguably more important now, assuming that the remote working trend accelerates," says Loos. "Renovations and alterations of residential homes may become a significant trend as working lifestyles adjust. Repurposing of surplus office space into residential property in the years to come also promises to be a significant theme."
Buyers seem to be taking advantage of the lowest interest rates in decades
— what it means:
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