How will the credit amnesty bill affect the property market?

Adrian Goslett, CEO of RE/MAX of Southern Africa, gives his view on the credit amnesty bill and its potential impact on the South African property market

Despite industry objections to the removal of adverse credit information from the credit bureau databases, last month the Cabinet made the decision that all blacklisting will be removed from around 1.6 million consumers’ records. The decision to wipe the negative credit information was taken in an attempt re-enter these consumers into the market, which should, in turn, boost consumer demand and spending.

While this is good news for consumers who have paid all their debts but are still prevented from accessing further credit due to their bad credit listing, the credit amnesty bill may have the opposite effect in the housing market to what was initially intended, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

According to the National Credit Regulator, as at the end of March 2013, around 9.5 million consumers in South Africa had an impaired credit record. This is an increase of about 500 000 over the previous year and represents approximately 47.5% of all credit-active consumers. 

“The credit amnesty bill will positively affect many consumers who are currently unable to obtain credit, or in some cases jobs, due to the fact that they are blacklisted. However, in terms of the housing market, while it may have some positive impact with more buyers able to access credit and therefore purchase property, the fact that banks will no longer be able to glean consumer credit behaviour information from credit bureaus will mean that credit will be offered at a much higher cost in order for the banks to absorb the higher risk. The higher cost of credit could disqualify many of the potential homebuyers who are already facing the rising costs of food and fuel costs,” says Goslett.

The public will have until October 30 to comment on the proposed credit information amnesty, although there are no details as to when the bill will be implemented. Once the bill is implemented, consumers will still be liable for all their existing debt, however any adverse credit information will be cleared. This will relate to the following information:

  1. All adverse listings, irrespective of the value and irrespective of non-payment
  2. All adverse listings in respect of paid-up debt on an on-going basis
  3. All paid-up judgments on an on-going basis.

Goslett notes that even though banks and credit providers will not be able determine an applicant’s credit worthiness via their credit report, financial institutions will still have to put systems in place to assess the applicants’ creditworthiness in order to ascertain whether or not they can afford the home loan. This process will cost the credit providers more money, the cost of which will ultimately be passed on to consumers.

Goslett says that another concern is that expunging credit information puts banks and lenders at a higher risk, which means that it is likely that they will be far less inclined to grant loans meaning that home loan approvals could once again see a decline. “Knowing that there may be far more consumers in the market who are likely to default on their loan repayment will definitely make lenders far more conservative when it comes to issuing credit. While the credit amnesty bill will open up the market to consumers who may have adverse records but who can now afford to make repayments, it will also open up the market to possible delinquent payers. This could essentially mean a higher number of bad debts in the future,” says Goslett.

As financial pressure mounts due to the rising cost of living, many consumers are already struggling to make repayments on their debts due to already high debt-to-income ratios, which are likely to worsen in the future. Reports reveal that consumer loan defaults are continually rising and that the number of civil summonses for debt - the first legal step in the recovery of debt - had jumped by 5.6% year-on-year in July this year.

According to an article on Fin24, four key reports have found that South African consumers are likely to fall even deeper into the debt trap in the future. Reports from the International Monetary Fund (IMF), the World Bank, the South African Reserve Bank (SARB) and the TransUnion Consumer Credit Index all found that consumer debt levels were high and rising.

Goslett says that essentially what this means is that even if consumers have clear credit records, they will need to focus on paying down existing debt before attempting to take on any new credit. “With consumer credit health deteriorating due to limited household cash flow and a higher cost of living, more focus will need to be placed on reducing debt levels rather than rather than attempting to take on further debt that is not affordable,”  Goslett concludes.

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