First-time home buyers now less reliant on mortgage debt than a decade ago

Standard Bank economist, Siphamandla Mkhwanazi analyses Standard Bank’s mortgage applications data and finds that first-time buyers are borrowing less per rand of earnings — but now need bigger deposits than in 2006.

You can read the full report by clicking on the link below the article, herewith the main findings of the report:

Main findings:

·         Consistent with overall declining consumer indebtedness in SA, as evidenced by debt-to-disposable income and mortgage advances-to-disposable income ratios, we show that first-time buyers have borrowed decreasing amounts relative to their disposable income. As a result, mortgage indebtedness has improved structurally for first-time buyers despite cheaper debt over most of the study period. As at Q1:16, SBR’s Loan-to-Income Index for a first-time buyer was 12 percentage points lower than a decade ago.

·         Further, we show cyclical elements to the way homes are financed. SBR’s Deposit Index shows that deposits rise when economic growth slows, and also when interest rate cycles are in a hiking phase as is currently the case (since December 2013). The index troughed at 0.5 in Q3:13 and is currently at 4.8. This is still below the peak of 7.4 in Q1:09.

·         As a result, we estimate that a median first-time buyer needs to raise 1.7 months’ worth of disposable income to fund a first home. The Deposit Index is currently rising due to slowing growth and rising interest rates but still better than its peak of 3.2 months’ disposable income during the global financial crisis.

·         Analysing the first-time home buyer’s wallet, we find that it would have taken a median first-time buyer approximately 19 months to save a deposit equivalent to 1.7 months’ disposable income (as required currently). This is due to first-time home buyers’ low savings capacity, aggravated by slowing economic growth. Comparatively, it would have taken 39 months during the global financial crisis, and just 2 months in Q2 2013 before SA entered the current downward phase of its business cycle.

·         The fall in deposit required (to 2 months’ savings) is compatible with previous research which shows that Loan-to-Price Index rose significantly post global financial crisis to Q3:13.

·         Affordability for first-time buyers is also under increasing pressure because of rising interest rates. The cumulative 200 bps rate hike since January 2014 has increased mortgage payment by about R1,000 p/m, thus reducing new home buyers’ probability of affording a mortgage

Read the full report 


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