Property Barometer - Some buying considerations in tougher times

In tougher economic times, aspirant home buyers need to consider the future costs that will come with the type of home they buy, as well as the implication surrounding the fact that home values can decline, says John Loos, FNB Household and Property Sector Strategist.

According to Loos one of the big myths surrounding the residential property market is that house prices always go up. He says that this is absolutely not true. However we should keep in mind that in South Africa, which has a significant general inflation rate with regard to consumer prices and wages, house prices, over time should go up more than they go down.

National “corrections” in real terms, where prices still inflate but at a lower rate than consumer price inflation, are more common occurrences. Downward corrections either in “real”terms only, or in all-out nominal terms, should not be seen as a bad thing.

Ideally, asset prices should reflect the economic fundamentals of the country and of specific regions or areas. If those fundamentals, such as economic performance, deteriorate, asset prices should correct accordingly. This is what a healthy well-functioning market looks like and is a healthy situation to have.

However, when home owners are not prepared for an event such as a home value decline, often because they make their buying decision based on the fallacy that the value can never drop, they can become “over-committed” financially, says Loos.

This situation sees many buyers often taking out a 100% loan-to-value bond, including other debts to finance transaction costs or furniture and appliances for their new home. Loos says that while other debt is unsecured, the assumption behind the 100% loan-to-value bond, made by both the lending institution and the home buyers, is that the home’s value will hold, and even increase in time, thus providing “cover” should financial tough times arrive and the household not be able to service the loan.

And all though the home could easily be sold and the home loan debt settled, the problem arises when home values fall. It is easy to think “it will never happen to me,” even in these current low interest rate times, the FNB Estate Agent Survey estimates that 13% of sellers are selling in order to “downscale due to financial pressure”

When home values fall, because it limits the financially pressure household’s ability to “trade out” of their properties. This situation according to Loos is known as “negative equity” - a situation where the household owes more on the bond than what the home is worth, because the home’s value has dropped.

The home can still be sold, but if it can only fetch a lower price, it can mean that there is still some bond debt outstanding.
The FNB House Price Index is still rising year-on-year but in reality the index’s pace of inflation has been gradually slowing for over a year-and-a-half, which is the natural response to a weakening economic growth rate over the past few years as well as rising interest rates.

It is important that home buyers understand the risks and understand the risks and act accordingly. The usual advice in such times normally goes about limiting your borrowing or spending commitment, and this is a good place to start.

FNB however suggest that consumers should go further than that, they should also consider how certain credit driven purchases can impact on non-credit driven spending commitments.

One can do this by considering limiting the size and value of one’s home. The house is the one item that influences spending commitments more than any other single item. The implications
extend to home maintenance, the rates and tariffs bill, insurance, and of course all of the furniture, fittings and appliances that we fill our homes up with.

If you consider the smaller home, you will see that because there is less space there is also less space for “stuff” and it could quite possibly also mean less electricity consumption. 

“The lower the value, the less the rates bill should be (I say “should be”), and the less the “frills
such as garden and swimming pool the less the water needs, and of course the less the maintenance needs and insurance costs,” adds Loos.

Buying within your means and being able to afford a “sizeable deposit” would ensure that you would be borrowing at less that 100% loan-to-value, perhaps at 90% or 80%.  A lower loan-to-value provides something of an extra safeguard should home values decline.

“ People often ask me “is now the time to buy or not?” says Loos adding “that’s an impossible question to answer. People don’t buy homes purely to maximize financial gain. The majority buy homes because they want a place to live in, and don’t necessarily want to wait for years for the
market to be exactly “right”.

“ But, in what appear to be tougher economic and financial times arriving, it appears time for a more conservative home buying approach for many.”

Is a more conservative approach starting to happen yet? “For some, the answer would appear, yes, and we see certain hints of this in our FNB Estate Agent Surveys of recent quarter. These signs include a recent decline in the percentage of sellers selling to upgrade to “better” properties, and a rising percentage of sellers selling in order to downscale “due to life stage”
In addition, we have seen some decline in the percentage of buyers deemed to be 1st time buyers, as well as in single-status buyers.

These often younger buyers can remain in the rental market for a bit longer if need be, or in their family homes. Of the sellers downscaling due to financial pressure, the agents are also starting to indicate that more will “rent down” as opposed to “buying down”

Such an apparent recent shift in home buying/selling patterns towards greater conservatism comes at a time when consumer confidence has plummeted. Such a shift currently seems entirely appropriate.

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