Applying for a bond in 2021 is ‘going to get tougher’

With some R5bn worth of income tax increases expected to be announced in February, and the possibility of wide-scale retrenchment a reality this year, banks can be expected to tighten their bond approval rates. But prospective buyers would do well to go in low and pay off their debt as soon as possible – here’s what the experts forecast as we head into 2021. 

The residential property market is expected to start losing some of its 2020 momentum soon, even though inflation is likely to remain depressed by a number of factors and the Reserve Bank is likely to keep interest rates low until at least 2022.

Berry Everitt, CEO of the Chas Everitt International property group, says the biggest market obstacle in 2021 will be a predicted increase in SA’s already very high unemployment rate in the wake of the Covid-19 pandemic.

“Especially worrying is the unusually high number of the middle- to upper-income consumers who are usually better insulated against economic shocks but are currently struggling to make ends meet as a result of pandemic-related retrenchments and company closures.

“The banks are of course aware of this and already tightening up on their home loan credit criteria in response. So even though we expect demand to remain strong, especially at the lower end of the market, we also foresee that bond approval rates will decline overall, and that demand will translate into fewer actual sales this year.”

‘Fewer grants for 100% home loans’

The demand for homes priced at less than R2m is expected to remain very lively in 2021 as long as interest rates remain at current levels. This demand will be supported by large numbers of first-time buyers as well as repeat buyers downscaling from more expensive properties, says Gerhard Kotzé, MD of the RealNet estate agency group.

“However, we may see the actual number of transactions in this bracket start to slow down as the banks begin to lend more cautiously in the face of growing concerns about employment stability. In fact, we are already seeing bond approval numbers drop from the highs of July and August 2020, and fewer grants for 100% home loans. The possibility of large-scale retrenchments this year in big private sector companies and the public sector is especially worrying,” says Kotzé.

While low-interest rates undoubtedly makes buying property more affordable, Tony Clarke, MD of the Rawson Property Group says they also offer an important opportunity for consumers to consolidate finances, pay off debt and boost savings.

“We had a flood of buyers hitting the market in response to the interest rate announcements, across all regions and in all price bands,” says Clarke. “This was particularly evident in the under-R1mil price bracket, which achieved a total of 43.92% of sales. The next most active bracket was R1mil – R2mil, which achieved 35.99% of sales.

“Furthermore, our buyer profile data has uncovered that a good percentage of our buyers are first-timers on the market, but upgrades, holiday homes and investment purchases also feature strongly. As for the most popular property type, conventional freehold homes take first place, with sectional title coming in second.”

Everitt says, “Many affluent investors made an early move last year from equities to luxury bricks-and-mortar which, along with gold and other hard assets, is regarded as a safe haven in turbulent times, and offers many opportunities for tax relief.

“At the same time, and especially in SA, consumers reacted positively to the steep interest rate cuts introduced to try to stimulate the economy – or at least keep the wheels turning – in the face of the pandemic. The banks also proved very keen to grant new home loans and literally thousands of long-time tenants took the opportunity to become first-time homeowners – with the result that many real estate companies achieved record sales in the second half of 2020.

“The strength of this trend can also be seen in the growth of SA’s average home price, which ended the year only mildly down on 2019, just as we had predicted despite the country being in lockdown during the second quarter.”

‘Constrained supply in under R2 million market’

Kotzé says he expects price growth and possibly even real (after inflation) price growth in the under-R2m market this year “due to steadily tightening inventory constraints, especially at the lower end of this sector.”

Meanwhile, he says, the second tier of the market (between R2,5m and R4m) is set to encounter strong headwinds, and owners in this sector who need to sell their homes should list them as soon as possible.

“We foresee that middle-income consumers are in for a tough 2021, with debt relief measures having come to an end, minimal salary increases expected and the cost of everything from schooling and medical aid to electricity, water and transport set to rise as usual. In addition, some R5bn worth of income tax increases are expected to be announced in February. 

Coastal towns benefiting from decline in SA homeowners planning to emigrate

“The decline in the number of SA home owners who are planning to emigrate is a positive for the market – and especially for the smaller towns and coastal areas that are seeing a surge of executive semigration as the remote-working trend gains ground, and a corresponding decline in housing inventory,” adds Everitt.

However, he suggests supply and demand overall are expected to remain very much in balance this year – even though they may show quite sharp local fluctuations from time to time – and what this means is that there is unlikely to be any significant increase in home prices.

“And of course, the Rand is still at attractive levels for foreign buyers of SA property when compared to dollars, pounds or euros, which will help to bolster the luxury market once there are fewer travel restrictions between countries and continents.

“But at the same time, we expect the number of distressed sellers to increase this year and bring more inventory to the market, along with landlords who have been struggling for months with non-paying tenants and have now decided to offload some of their rental properties.”

Clarke suggests using the next couple of months wisely.

“It will go a long way towards minimising the effect any future interest rate increases will have on the security of existing property investments, and help new purchasers cover their fees and deposits, despite tight financial times,” he says. “We don’t expect interest rates to start climbing until the second quarter of 2021 – and even then, they’ll likely climb slowly – but these optimal conditions will end at some point, so make the most of them while you can.”

‘Selling to alleviate financial pressure’

Consequently, Kotzé says the number of homeowners who are selling to alleviate financial pressure can be expected to rise, and the number of distressed sales can also be expected to increase. This will add to the available inventory in this category and put downward pressure on prices.

“In fact, homes that are being sold through the bank’s distressed seller programmes are generally only reaching 85% to 90% of value now, compared to an average of about 95% at the start of 2020. And we expect that they could go as low as 80% of value.”

This will of course present some great opportunities for buyers but, says Kotzé, will also leave many distressed sellers in the position of still having to pay off quite a large portion of their outstanding home loan, even after their property has been sold.

“Although their credit record will be preserved, this will hamper their financial ability to secure another property or even a rental home, so once again we would urge anyone who needs to sell now to do so without delay.”

Everitt says there is absolutely no sense in home sellers taking their homes off the market now in the hope of selling at a higher price in a few months’ time. “The fact is that the macro-economic factors are more than likely to suppress the current wave of sales, and to put the damper on price increases going forward, so those property owners who need to sell now, for whatever reason, should really attempt do so as soon as possible.”

‘Quality tenants have become home buyers’

Looking at the rental market, he says rentals are likely to show only very minimal growth (if any) due to the current combination of high vacancy rates and economic pressures on tenants – and that most landlords and rental agents are likely to apply increasingly strict credit and rental record checks. Deposit requirements are also likely to rise.

“A very large number of quality tenants have become home buyers in 2020 due to the lower interest rates, and on top of that landlords have had to contend with extensive non-payment issues due to the economic effects of Covid19 pandemic and lockdown, so they are already very cautious when it come to new tenants.

“And unfortunately, a large number of those who are likely to be looking for rental properties now are people who already have some financial problems, so there will be a need to be even more careful – and to enlist the help of professional rental agents,” says Kotzé.

Alternatively, quite a number of rental property owners will probably just decide to sell off their portfolios now, so astute investors who have the means to buy quickly should look out for the “bargain” flats and townhouses that will come on to their local markets as a result.

With regard to the real estate industry itself, he says the pandemic has already caused a contraction in agency numbers similar to that experienced after the Global Financial Crash in 2008. “As a result, many part-time or non-serious agents have exited the market once again, and the industry is again seeing significant convergence of the top performers around the larger companies with established brands and, equally importantly, the knowledge, technology and means to support agents who want to work remotely.

“As an example, the RealNet group has grown from around 300 top agents to around 400 since the start of 2020 and expect a similar number if not more to join us in the next 12 months.”

Article courtesy of Lexis Digest & Property24