South Africa's homebuyers are avoiding hefty deposits - here's why

Buying a home is always an incredibly complicated affair. From applying for a home loan to navigating legally binding documents like the OTP, you are no doubt well aware of the variety of strict processes that come along with the purchase.

Adding on top of that how much more difficult it is for buyers to invest in property after a recession, finding a way to avoid paying hefty deposits is perhaps one of the easiest ways to make your dream home a reality.

Fortunately for the consumer, 2022 might actually be our silver lining.

The national loan-to-price ratio is at an all-time low

Referred to as the proportion of the purchase that banks and lenders are willing to fund, the national loan-to-price ratio has increased to a remarkable 94.9% within 2022's first financial quarter. This implies that the national deposit rate that a homeowner is expected to pay could be as little as 5% of the overall cost of the home.

Data collected from the FNB deeds office confirms that this ratio is the highest its ever been since the 2nd quarter of 2008. 

"The higher the ratio, the smaller the deposit the buyer has to raise. Generally, the higher the ratio, the more willing lenders are to fund property purchases," explains Siphamandla Mkhwanazi, FNB senior economist.

Coincidence?

Some of you may be aware that the last time our deposit ratio was so low coincided with the initial stages of the Great Recession of 2008 which was sparked by the US credit crunch and subsequent property crisis. The fact that we have just come out of a mini-recession caused by a global pandemic is one of the main driving forces behind this. 

When asked to describe the reason in more detail, Mkhwanazi explains that intensifying competition among lenders, at a time when volume growth is slowing, continues to drive these deposit rates down. When times of slow growth permeate society, banks and institutions need to ensure that the economy is still stimulated enough.

"I suspect this competition is for customers with good balance sheets, but we have also seen it in affordable markets," explains Mkhwanazi.

What are the stats?

According to FNB's House Price Index, the average cost of homes is starting to stabilise and showing growth dipping lower in April at 3.9% year-on-year when compared with March at 4.1%.

Despite the fact that we have had to face challenges in the market through recent geopolitical tensions in Europe as well more local concerns such as the floods in KZN, all indicators continue to suggest that the property market remains incredibly resilient.

What to expect going forward 

Financial institutions countrywide expect that interest rates will continue to rise on the back of inflationary pressures most likely instigated by the war in Ukraine. Read more about that here.

The rising rate of inflation has forced the SA Reserve Bank monetary policy committee (MPC) to hike up the repo rate by at least 25 basis points in both January and March. This move brings prime to 7.75% in an attempt to manage the rising inflation rate.

Whether this move will be enough to keep our economy stable remains to be seen. Homes of Distinction will continue to keep an ear on the ground.

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