‘Deposit drag’ keeps market on a choke-chain

Everyone in the property market knows that the current deposit requirements for home loan approval are among the biggest obstacles to increased home sales and faster property price growth.

But just what the extent of the deposit obstacles might be has not been quantified until now, with the release of new statistics by BetterBond, SA’s leading mortgage originator, which show how the home buying plans of many consumers are being delayed by many months due to rising deposit requirements.

The BetterBond figures, which represent a quarter of all residential mortgage bonds being registered in the Deeds Officeand include applications to, and bond grants from, all the major lending banks in SA, show that in the 12 months to end-February, homebuyers and owners in SA took up more than 80 000 new home loans, with more than 96% of those loans going towards the purchase of an existing home or the construction of a new one.

In addition, the average purchase price of the properties on which these bonds were granted rose 8,5% year-on-year to R867 000.

“But although these are healthy signs that the residential market is in recovery,” says BetterBond CEO Rudi Botha, “we believe it would be gaining momentum much faster if it were not for the fact that the size of the deposits that prospective homeowners are expected to pay is also increasing – and not in proportion to the rate of home price increases.”

For example, he says, the average value of the bonds granted in February, at some R745 000, was only 6,7% up on the average value in February 2012.“In other words, the bond value gain is not keeping up with the home price gain – and the discrepancy is explained by the increase in the average deposit required, which has gone from 16,1% of purchase price a year ago to 16,7%. This has boosted the actual cash requirement for the average deposit from about R129 000to around R145 000.”

Meanwhile, the average household income of bond applicants has actually remained static over the past year at around R46 000, so for those who do not have equity in an existing property and need to save a deposit, the time that would be needed to do so has gone from 28 months to 32 months (assuming they are able to save 10% of their income per month).

And this four-month delay appears to be the minimum extent of the ‘drag’ that current deposit requirements are having on the market.BetterBond statistics show that the average purchase price for first-time buyers has risen more than 16% to R677 922 in the past year, while the average deposit requirement has gone from 8,6% of purchase price to 10,1%.

During the same period, the average income of first-time buyers applying for home loans has only risen about 5,5%, with the result that the estimated time it would take the average first-time buyer to save up a deposit, at the rate of 10% of earnings per month, has gone from about 17 months to 23 months.

“It will of course take much longer for those who cannot save as much, or those who plan to buy higher priced properties,” notes Botha. “Our stats show that those seeking to buying a first home priced at between R1m and R1,5m would now need 54 months to save a deposit - as opposed to 44 months a year ago – a very long wait during which they are very likely to lose out on the interest rate and home price advantages of the current market.”

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