Financially Vulnerable? (The Bugle)

How financially vulnerable are you? This is a topic of interest to financial service providers in particular. All the information collected on a mortgage bond applicant is to provide the bank with a profile so as to be able to take a calculated view on your ability to honour the debt repayment commitments. The mortgage provider is taking a gamble on their clients being able to repay the debt over a relatively long period, with 20 years being the normal term of a mortgage loan, although the average mortgage loan period is far shorter. It is impossible to predict outcomes a year or two in advance, so to take a twenty year view all comes down to managing risk and having sufficient security. The banks are experts in this and when economic growth is slow and consumer finances are under pressure, lending criteria become significantly tougher and effective interest rates at which mortgage loans are provided, are increased. Our prime interest rate is currently 8,5%. Whereas pre-2007 most rates quoted by banks were prime less a certain percentage, nowadays most rates quoted are prime plus a certain percentage based on their risk profile they attach to you. As an example FNB take the data provided by the South African Reserve Bank in their quarterly reviews and calculate the Household Sector Debt Service Index which is an excellent measure of the country’s household sector vulnerability and its ability to service its debt in the future. From a revised 1^st quarter 2013 index level of 6.54 (on a scale of 1 to 10), the 2^nd quarter saw a slight rise to 6.59. The higher it goes the more vulnerable households are. Relative to its long term (33 year) average of 5.2, the index remains high. The index is compiled from three key variables, namely, the debt-to-disposable income ratio of the household sector, the trend in the debt-to-disposable income ratio, and the level of interest rates relative to the long term average (5-year average) consumer price inflation. When an economy is exposed to unwanted “shocks” such as interest rate hikes or downward pressure on disposable income, the ability to weather these storms depends largely on how vulnerable households are at the time. So where are these three key indicators trending towards and what should we watch out for? Firstly debt-to-disposable income remains high at over 75% and although this has declined from the peak of approx. 83% in 2008, the trend (which brings us to the second variable) has changed and the 2^nd quarter of 2013 saw a resumed rise in the ratio. Disposable income has been decreasing over the past few quarters, but debt levels remain high. If debt levels trend upwards, suddenly this ratio will increase and our vulnerability status will increase accordingly. The third key variable of interest rates to consumer inflation is high at 7 (out of 10). Interest rates are currently low, and have been for a while, but the risk now is that they have little further room to decrease and the probability is that they will increase over the next few years. FNB predict that households, given their current profile, could handle interest rates increasing to around 11,5% before severe financial pain would set in. This 3% interest rate hike would be considered mild by historical standards. The warning now therefore is be very careful before adopting more debt.

(Author: Andreas Wassenaar, published in The Bugle, 25 Sep 2013)

Pre-qualification the Key for Buyers (The Bugle)

If you have recently applied for home finance, you may well have experienced a long drawn out bureaucratic process, which may not even have resulted in a positive outcome, despite your positive credit record. Self-employed commission earners are prejudiced severely by the current lending criteria imposed by most banks.  This can be very frustrating for the applicant who could have wasted a lot of time house hunting, and equally as frustrating for the estate agent servicing the prospective home owner. Sellers in general have realized that offers, which are subject to a mortgage bond condition, are far from conclusive and will typically continue to market a property until all the finance is approved. 

According to Ooba, South Africa’s leading mortgage bond originator, their latest figures indicate that the average initial decline ratio is 47.3%. That means that the first bank will decline almost one out of every two, mortgage applications received. This is not a very encouraging statistic for a homebuyer requiring mortgage finance and would suggest that a different strategy would be required. Ooba furthermore advises that the average deposit required by banks is as high as 14.6% of the purchase price, which is even higher than the 12.5% of a year ago. For those contemplating 100% finance, this will be an instructive statistic and highlight that more than likely you will require a plan B if you are going to be moving into a new home anytime soon. Apart from providing a more efficient application process to banks, mortgage originators know each bank’s individual lending criteria and will shop your application around across the four main commercial banks, and depending on your profile with leading private banks as well. This key advantage of dealing with one contact person and application for several submissions is highlighted by the 29.9% ratio of applications declined by one lender but approved by another. Almost a third of all applications are therefore going to rely on a second or third submission. Ooba’s effective approval ratio is therefore 66.8% demonstrating how important it is to shop around when considering mortgage finance. Many people do not realize that they only get one shot at the application process. Should you provide insufficient or incorrect information, the chances are that you will be unsuccessful. 

So what is best approach? Ooba have developed an excellent pre-qualification process to eliminate time wastage and highlight any major stumbling blocks. Affordability and credit issues are picked up immediately and the applicant will have the opportunity to remedy these, if required, prior to a mortgage bond application being submitted. Affordability can be improved by consolidating existing debt over a longer repayment period and credit issues can be addressed through the services of a credit rehabilitation company.  The benefit to a buyer of being pre-qualified is that they will receive a full credit report, credit position and payment profile allowing them to shop with confidence in the correct price bracket. On receipt of an offer to purchase by a seller from a pre-qualified applicant, this will viewed in a very different light and provides the buyer with a negotiating advantage.

(Author: Andreas Wassenaar, published in The Bugle 18 Sep. 2013)

Demand for Residential Property Surges (The Bugle)

There seems to be a contradiction in the residential property market at the moment. On the one hand we are seeing improving demand along with increasing supply constraints across certain price brackets. On the other hand we have seen a slowing of real household disposable income growth, weaker consumer confidence and lower economic growth. So what is going on? Is the surge in demand we have seen this year just a cyclical peak or is it part of a trend? Is it sustainable? 

The post recession period (after 2009) has seen two mini-surges in demand. The first was in 2010 in response to the interest rate cutting that preceded this period. The second was from late 2011 to present, with a bit of a lull in-between. This can be clearly depicted by FNB’s market strength index, which measures the difference between the FNB Valuer’s market demand rating and market supply rating. These two indices are heading towards each other as demand increases and supply decreases. So although the FNB Market Strength Index is at 47.32, just below the critical 50 level where overall demand equals supply, it is heading in the right direction and estate agents in general will be able to testify to this higher level of buying activity being experienced.  Nominal House Price growth as measured by FNB is currently 6,4% year-on-year and moving up marginally. ABSA’s latest published figures indicates nominal house price of 9,8%, which is trending downwards. The 10-year overview in FNB’s House Price Index indicates nominal house prices up 139.48% in August 2013 compared to August 2003. In real terms, adjusted for inflation, this index is up 37.99% over the same period. We can expect overall nominal house price escalation for 2013 to be in line with CPI inflation of around 6%. This means that it really does remain a buyers market even though the volume of transactions has picked up. 

As the growth in mortgage extensions has been marginal the surge in demand is not being fueled by more favourable debt conditions as interest rates remain unchanged and lending conditions are still tight. The number of cash buyers could be one explanation for the surge in demand. Most people will only sit on cash for so long as they understand that when the return on money market funds is similar to the inflation rate, their real returns are close to zero. Equity markets have been volatile and unpredictable. The JSE All Share index was up 8.3% in Rand terms on 7^th September since the beginning of the year, but actually down by 10% when measured in US Dollar terms. In contrast the US Dow Jones Industrial Average index is up by 13.9% since the beginning of the year and the US S&P 500 index up by 15.9%. You can understand why foreign money has preferred the relatively safe and higher returns offered by the US equity markets. While none of us have a crystal ball, the welcomed recovery in demand for residential property is something we hope will continue.

(Author: Andreas Wassenaar, published in The Bugle, 11 Sep. 2013)

External Shocks and your Mortgage Rate (The Bugle)

Watching CNN this past week and the rising threat of a US-led invasion of Syria has direct consequences for South African consumers and those property owners with mortgage bonds. This type of middle-eastern turmoil has the risk of higher oil prices, which impacts the global economy in terms of lower growth. This in turn impacts on our own South African economic growth rates and therefore on local employment and household disposable income. Higher global oil prices also directly impacts our local cost of fuel. A weakening Rand exchange rate further increases the cost of our imported oil. As higher transportation costs touch almost every part of the economy and increase our local inflation rates, you understand how a decision by the US to become actively involved in Syria can lead to higher local inflation (and therefore potentially higher interest rates) and lower economic growth. These “external shocks” to our local economy are nothing new and our ability to weather the storms depends on the health of our balance sheets. In 2001 as an example the world experienced the 9/11 terrorist attacks on the world trade centre buildings and other targets. This was a massive external shock. At the time however our local household debt-to-disposable income ratio stood at 55.3%. It currently sits at 75.4% making us more vulnerable to a spike in inflation and interest rates. The secret to weathering storms caused by external economic shocks is a low level of indebtedness to keep the debt-service ratio low even when interest rates rise. This is true for a nation as a whole or for individuals. You cannot control the external shocks, but you can determine your level of indebtedness and strength of your personal balance sheet.

The recently released South African Leading Business Cycle Indicator data (June 2013) by the Reserve Bank indicate a mild decrease  (-0.25%) for the 3 month moving average. The year on a year figure for the same statistic is mildly positive at +2.36%. As the broad growth of property trading activity correlates reasonably well to the Leading Indicator, it therefore becomes and important statistic for property people to watch carefully. What has been interesting is the surge in property transfer duty receipts, which indicates increased volumes of trade nationally. This has been our experience on the ground during the first 8 months of 2013. Sales volumes are up even if pricing is still down in general. This increase in sales activity is reassuring for estate agents and sellers in general.

Our current GDP growth figures have come out at 2% and the producer price inflation figure for July 2013 is 6.6%, up from 5.9% in June, which is indicative of a weaker Rand translating into local inflationary pressure. Slightly higher inflation rates can therefore be expected but interest rates are nevertheless still predicted to remain the same for the next 6 months.

(Author: Andreas Wassenaar, published in The Bugle 4 Sep. 2013)