Homeowners under financial pressure are being forced to sell their properties or restructure loans with bond repayments rising as much as 40% since 2021 due to rising interest rates.
Since November 2021, the Reserve Bank has raised the repo rate by 475 basis points to 8.25% to contain inflation. While warning that the hiking cycle was not necessarily at its end, the Bank kept rates on hold in July.
For the six months to June 30, Standard Bank said pressure on consumers had increased, particularly in the home loans sector, with monthly bond instalments rising dramatically since the hiking cycle began.
Toni Anderson, head of home services at Standard Bank, said an increasing number of homeowners with bonds have been unable to afford their full instalments,
“Increases in the repo rate have affected consumer spend resulting in slightly higher arrears levels across all price brackets particularly customers with higher debt to income ratios,” Anderson told Business Day.
According to Lightstone data, the 155,000 homeowners who bonded properties in 2021 are paying altogether R600m, or 40%, more a month to service loans. Lightstone provides data, analytics and systems on property, automotive and business assets.
Of those 2021 loans, 46% were to first-time buyers.
“Sectional schemes, which account for 27% of the increased instalments, will be at risk if affordability leads to defaults,” said Hayley Ivins-Downes, head of digital at Lightstone Property.
For example, at a development in Centurion, 405 out of 520 were bonded in 2021 at an average loan value of R650,000. The repayments rose from R5,200 to R7,200 a month.
The FNB Property Barometer for June shows that financial pressure-induced selling rose from 17% in the first quarter of 2023 to 24% in the second quarter — higher than the historical average of 18% since the fourth quarter of 2007.
The affordable sector of properties priced below R250,000 and those in the R250,000-R500,000 bracket recorded the highest percentages of sales, at 32.2% and 41.5%.
“Overall, homeowners with properties priced from R500,000 to R3.6m recorded double-digit percentages for financial-induced selling,” said Siphamandla Mkhwanazi, senior economist at FNB.
Mkhwanazi said that with the property market slowing, properties take longer to sell. In the fourth quarter of 2021, it took 7.1 weeks to sell property, and this rose to 12.1 weeks at the end of the second quarter of 2023.
According to Samuel Seeff, chair of Seeff Property Group, there is financial pressure in the sub-R1.5m price bracket with more listings coming onto the market.
“In higher priced properties, which are more susceptible to economic and business confidence than rising interest rates, listings have not risen but fewer sales are achieved,” said Seeff.
Andrew Golding, CEO of the Pam Golding Property group, said that apart from rising interest rates in the past nine months, the property market in some localities has a shortage of correctly priced properties, and in some instances, oversupply.
“To an extent, sellers are mindful of the challenging economic environment, and to this end, are adjusting their asking prices in line with the market thus resulting in successful sales,” he said.
Golding said that in their portfolio there is high demand for properties priced from R1.5m-R2m, with some homes selling within days of listing.
Arrears
Given the prevailing economic environment, 43% of those surveyed in the Absa Homeowner Sentiment index for the first quarter of 2023 considered it appropriate to sell property.
Demand in the bank’s home loans market slowed as application volumes decreased across the industry on the weaker macro environment, resulting in slower annual growth.
In its results for the period ended June, Absa said rising interest rates resulted in increased arrears, debt review and nonperforming loans.
Nedbank said loan defaults and impairments for the 12 months ended June increased for similar reasons.
“Homeowners’ financial strain is evident across the portfolio, especially the mid-to-high value property segments,” said the bank.
Nedbank said it remains committed to keeping clients in their homes while managing risk within long-term risk and return thresholds.
Credit impairments
Nedbank reported slowing growth of 6.7% year on year in May in household loans and advances from 7.9% in January.
With the overall home loans market contracting 22% in the first quarter of 2023, Nedbank’s application volumes were down 18% year on year, with new loans granted up 2%.
“We expect to continue seeing a downward shift in home loans volume-demand as customers remain credit conscious and focus on reducing existing borrowings rather than acquiring new long-term debt,” said Nedbank.
Credit loss ratios rose from 30 basis points in the first half of 2022 to 98 basis points in the matching period in 2023.
Standard Bank’s credit impairments reached 0.48% in the first half of 2023, with the bank’s market share at about 32%, said Anderson.
Absa’s credit impairment charges rose significantly from R272m in June 2022 to R975m this year.
The bank’s nonperforming loans (NPL) rose from 5.29% to 5.82%, with the NPL ratio rising from 7.1% in June 2022 to 8.1%.
Over the past 12 months, the bank’s mortgage market share remained stable at 23.7%.
According to Radebe Sipamla, investment analyst at Mergence, the challenging macroeconomic environment is the main reason for impairments increasing.
In Absa’s case, Sipamla said it is important to remember that the bank changed its models in 2022 and migrated to what local banks use.
Absa said that initially, when these loans were written during the peak of the pandemic when interest rates were low, it priced in a 300 basis points rise in interest rates. The increases were more rapid than expected, however, and far exceeded this target.
“The pressure is more on first-time buyers who are not able to absorb higher inflation and rising interest rates,” said Sipamla.
He said Standard Bank impairments are low compared with those of its peers because of its quality risk model. The bank is well-positioned in the market.
Sipamla said the mortgage market has been shrinking, and with disposable incomes under pressure, few people can afford to buy property.
Banks are mindful of the risk and have tightened their affordability criteria and scoring metrics to eliminate high-risk clients.
“I don’t think banks would reduce their exposure, however, as in the long term they want to grow in a sustainable manner,” said Sipamla.
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