How affordability levels affect the market

According to statistics from the South African Savings Institute, household savings in relation to GDP is at just 1.7%, indicating that South African consumers have a poor saving culture. On average, the household debt ratio in relation to disposable income is around 75.8% and household disposable income is at just 2.4%.
“South Africa is considered to have a relatively low savings rate when compared to other emerging markets around the globe,” says Adrian Goslett, CEO of RE/MAX of Southern Africa. “The implications of a low savings rate at household level is that if there are not enough savings to fund the requirements of a household - be it for consumption or investment purposes - that household will be forced to borrow money. The effect of this is that the more consumers borrow, the less creditworthy they will become, which in turn pushes up the interest rates they will be charged.”
He notes that consumers who wish to purchase property in the future but don’t currently have a savings plan in place will need to start adjusting their financial strategy and put money aside. “The market phase we have seen over the past few years has produced some excellent opportunities for buyers to get their foot into the door, however it is concerning to think that so many have been unable to take advantage of the conditions because they do not have their finances in order. Obtaining the necessary finance to purchase a home is closely linked to affordability, but many households are struggling with high debt-to-income ratios and no savings – this emphasises the importance of personal financial planning,” says Goslett.
Before the National Credit Act was introduced in 2007, consumers had little trouble securing a home loan with small or no deposits. Today, most potential homebuyers will require some form of deposit along with the other costs associated with a property purchase such as transfer duty and attorney’s fees. “Deposit requirements vary depending on the circumstances but generally range between 10% and 30% of the purchase price. Buyers who have set aside savings for a deposit are finding it far easier to purchase the house of their choice,” says Goslett.
According to bond origination statistics, in 2007 approximately 70% of bond applications were approved and converted into home loans, in 2008 that number dropped to just 28%. In 2014 just over 50% of bond applications are converted to a home loan, which indicates that while the bank’s appetite for lending may have improved slightly, lending criteria remains stringent.
“The government’s clamp down on lending practises has forced financial institutions to take a far closer look at an applicant’s finances before issuing credit.  The idea is for the bank to have an overall picture of the client’s credit history, the total amount of credit outstanding as well as the applicant’s ability to pay debt off. For this reason, managing debt has become an essential part of the South African consumer’s life,” says Goslett.
He notes that due to the nature of the financial assessments carried out by the banks, a paramount factor is for an applicant to show the required level of affordability. Essentially this means curbing spending, reducing debt levels and increasing savings. Goslett says that there are several ways in which consumers can cut back on living expenses and show higher levels of affordability.
He provides some suggestions for those who are planning to invest in property and want to get their finances in order:
- Consulting with a professional financial adviser and planner, who will assist in formulating a personal finance plan
- Create a budget which includes a savings plan and stick to it
- Cut down on or cut out luxury and unnecessary expenses
- Shop around – comparing prices will help you find the best value for items and services
- Rather pay cash whenever possible and avoid charging it to credit
- Review insurance policies and medical aids regularly to ensure you are getting the best deal available
- Go green - save on electricity and water costs by cutting down consumption

Goslett concludes by saying that consumers who can cut down on their spending and reduce their household debt-to-income levels will have a far greater chance of showing the necessary affordability levels to purchase a home. “It is important for consumers to integrate a finance plan that works for them. While it may be difficult at first, it will bring them a step closer to owning a home.”

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