Safe as houses?

The 2020 Housing Paradox

This year has seen global economies devastated by the COVID-19 pandemic. South Africa, which was already on shaky economic ground at the start of the year, has been particularly hard hit. The Absa Economics team predicts a contraction in the country’s economy of 8.3% for 2020. While most economic sectors are feeling the squeeze, South Africa’s residential market may have inadvertently been bumped out the doldrums as government attempts to stimulate the economy.

South African consumer confidence is at its lowest since 1985. Erwin Rhode, economist and founder of Rhode & Associates, explains that the consumer confidence index is a reflection of how people view the state of the economy. However, he says, “A drop in consumer confidence is a trend that started long before COVID-19 .” He explains that South Africa’s economy has been in a slump for some time, and this depressed sentiment has simply been exacerbated by the pandemic. The coronavirus contagion and subsequent global lockdowns certainly increased people’s concerns about their financial security. An Ipsos survey published in June 2020 revealed that 90% of South Africans felt COVID-19 has impacted them and their families financially, 75% believed that at least one major employer in their city would go out of business, 53% said their personal finances had been severely impacted, and 35% had experienced a salary cut, 14% lost their jobs, and 6% were asked to take unpaid leave. In uncertain economic times such as these, Rhode believes people’s concerns about keeping their jobs and losing any future salary increases will definitely impact the property market. Over the longer term, people will not be as cash flush as they used to be, meaning property becomes less affordable. But South Africa’s property market is being impacted by factors other than affordability. Absa Home Loans’ Head of Data and Analytics Muziwakhe Zim, says that faith in the housing market is actually improving. He cites the Absa Homeowner Sentiment Index (Absa HSI), which assesses how people feel about buying, selling and investing in property. In 2020, the Q2 and Q3 data from this index indicated that, in the face of economic uncertainty, respondents regarded property as a resilient asset that could weather the storms of an uncertain economic future.

The allure of low interest rates

Adding to this is positive sentiment around property as an investment are lower interest rates. Over the course of 2020, the South African Reserve Bank substantially lowered interest rates to 7% in a bid to stimulate the economy. This substantial move has led to a surprising increase in buoyancy within the residential property sector as people can now, some for the first time, afford to buy their own home.

“Lower interest rates have made it possible for many of our customers to start their journey on the property ladder,” says Ewald Kellerman, Chief Risk Officer, Absa Home Loans. “Reduction in monthly repayments have reignited the age-old question of whether to buy or rent. And, while it is cheaper to pay off your own bond compared to someone else’s, new customers are flocking to the market in larger numbers than pre-COVID.”

Tony Clarke, Chairman of the Real Estate Board of South Africa (REBOSA) and MD of Rawson Property Group, adds: “We’ve see a boost in property market activity during this period, and have noticed, in the Rawson context, that 68% of our buyers in the last three months have been first-time buyers.”

This increased demand has also seen other positive effects. Where economists in the banking sector predicted a fall in house prices of between 5% and 15% in 2020, house prices went up year-on-year in August 2020. Additionally, houses are also being snapped up more quickly than before, with an average of 10 weeks and six days on the market, compared to the long-term average of 13 weeks and three days.

Chairman of the South African Institute of Valuers (SAIV), Tracey Myers, has noticed another interesting trend with regards to a fall in interest rates. “I have checked the building plans passed over the COVID-19 period, and this has stepped up considerably, which suggests one of two things: people are using the opportunity to improve their homes with the help of lower interest rates or that people are renovating to sell, as they look to purchase another property or to downscale.”

Rentals lose their lustre

One casualty of the economic downturn and lower interest rates is the rental market. Rhodes notes that in times of crisis, people tend to move out of their rental properties or sell their homes and move in with family. He adds, “There is evidence that home and flat rentals are declining in response to a growing affordability gap.” This is backed up by Absa, with Zim noting an increase in vacancy rates. He suggests that it could be an issue of affordability, but also that a lot of tenants are moving to buy while low interest rates make this a possibility.

The SAIV believes the rental market will remain attractive simply because, in uncertain times, it is often more affordable to rent than to buy and maintain a home. However, many people are not eligible for bank credit and are, therefore, unable to buy. Furthermore, investors are becoming increasingly wary of rentals. New laws, aimed at protecting tenants, are making rental portfolios less attractive as landlords worry that these regulations are open to abuse.

Interest rates will rise

But buyers do need to be warned. Although the property market is currently being buoyed by low interest rates, this is not an indefinite status quo. The experts all predict that interest rates will start rising by the end of 2021. However, Zim says: “The rise, we believe, will be so gradual that interest rates will not have recovered to pre-lockdown levels by the end of 2023.” Clarke believes it is in government’s best interest to keep rates low as a way to stimulate the economy. “Unfortunately, growth and recovery will be slow. The current interest rate still offers an important chance to consolidate finances, pay off debt and boost savings as much as possible,” he says.

That said, Myers is quick to warn that buyers should factor in the possibility of increased interest rates into their budgets. “My concern is that people have been able to afford to buy at low interest rates, but there will be a surge of bad debts and house repossessions when interest rates do increase.” She says that although she is expecting small incremental increases from next year, people must realise that interest rate increases don’t only impact mortgage payments. All loans are affected, including cars, credit cards and clothing accounts.

The banking dilemma

South Africa’s banks are painfully aware of the impact of debt linked to a rise in interest rates. Zim stresses this point when he says: “The banks have all taken different postures to lending in these times. Absa continues to be open for business, however, we have carefully balanced this with sound risk management.”

Certainly, risk is a big consideration for all lenders. Increased unemployment will also weigh heavily on lending decisions. Rhodes says that responsible lenders will ultimately become more conservative in their lending.

However, when you look at the stats, you may not believe this. “Lenders are very bullish at this time and are offering up to 105% bonds to qualifying buyers,” says Clarke. Despite their eagerness to lend, Clarke says they have noticed banks being supportive of current homeowners. “We’ve also seen lenders being extremely supportive of existing clients in financial difficulty. For existing homeowners, many loan agreements have built-in credit.

A blade that cuts two ways

The reality is that the South African residential property market is currently balancing on a knife-edge. Lower interest rates are underpinned by a very weak and uncertain economy. Therefore, all buyers need to be aware that no matter how much they can afford to buy at present, the realities of a recessionary economy will not simply go away. Stakeholders in the sector are unlikely to enjoy much government support as the state will have other priorities. Rhode believes that South Africa is in for a tough time.

For current buyers, Clarke reiterates sage and tried-and-trusted advice in urging buyers to use this time of low interest rates to pay off their debts as quickly as possible to protect themselves against the possibility of future economic difficulties.

Kellerman says Absa has been encouraged by the good financial discipline shown by many of its customers. “Absa’s version of liquidity assistance is named payment relief. We tried to stay away from implying that there is a ‘holiday’ or ‘discount’ of some sort,” he says. “Interest and fees continue to accrue to the account while the required repayment is reduced. We therefore specifically encouraged our customers to continue paying where they are able to do so in order to avoid having to catch up on interest after the fact. Interestingly, we saw a large number of customers who did not face income loss apply for payment relief and build a ‘buffer’ in their accounts. Additionally, after relief many customers opted to pay a little extra on the bond in order to avoid a longer term.”

While, over the course of 2020, leading financial institutions such as Absa have given more than 730 000 customers financial relief to value of R9 billion, the reality is that the South African economy is going to recover slowly. The message to property buyers is clear: Be savvy, be responsible and be aware.