Top challenges and tips for South Africans buying property
Top challenges and tips for South Africans buying property
For South Africans thinking about buying property, affordability is still the number one concern. This topped property size, location and other factors such as security and lifestyle.
According to the report, more than a third of house hunters (35%) in SA have to reassess their needs once they start searching for a property and looking at their chosen suburbs. Of these, 37% said affordability was their top concern, followed by property size (29%) and location (10%).
These were some of the key findings in Absa’s recently launched The Homeowner Insights report, which offers a unique perspective on the home-buying journey and what consumers in South Africa typically experience, as well as the difficulties they face.
Buying a home is likely to be one of the biggest long-term investments most people will ever make, says Carel Grönum, Managing Executive of Absa Home Loans, and there are risks and rewards that each individual has to weigh up in making their own decision.
Despite the general concern with safety and security that influences our daily lives, only 3% changed their decision based on how secure the home was, with the same figure for pet-friendly reasons and building aesthetics. At the bottom of the list, only 1% said lifestyle was the factor that made them reassess their needs.
“A total of 1 209 individuals took part in the first Homeowner Insights survey, which was conducted during May this year, representing a well-balanced and even spread across race, gender, age and personal income criteria,” says Dr Henk Pretorius, CEO and co-founder of digital market research company Columinate. “The survey focused on individuals who are decision-makers when it comes to household matters and the sample included tenants of rental properties, established and new homeowners, individuals intending to purchase a home within the next 5 years and investors who buy properties as investments.”
He says 32% claimed to be the sole decision maker, 58% were current homeowners and 10% of these were investors, with 42% in the aspirational homeowner group. The survey looked at six life stages, from singles to families and mature individuals, with 26-50 years being the predominant ages.
When deciding to buy or rent, the survey showed the most stressful part of buying a home was whether the bank would approve the home loan, outranking the number of bedrooms, size and property location.
While 87% of the survey respondents were confident they could afford their newly approved home loan instalments at the time of searching for a property, only 38% of home loan applications are being approved by Absa.
“This ‘disconnect’ suggests that there is much more to assessing affordability than meets the eye,” says Grönum, and the disparity between the customers’ understanding of their financial situation and how banks view things, creates a lot of anxiety for aspiring home buyers.
“While credit records and conduct of accounts play a key role when assessing home loan applications, affordability accounts for a large portion (22%) of customers’ home loan applications being declined. In cases where applicants have healthy credit records and good financial conduct, some simply cannot afford the monthly instalment based on the bank’s affordability assessment,” notes the report.
The main reasons why only two out of five consumer home loan applications are approved by Absa are firstly, an impaired credit record (35%), and secondly, consumers don’t always understand their own personal financial situation, says Grönum.
In terms of affordability influencing the decision to rent, 26% indicated the predictability of a monthly rental was their reason to rent and 19% said it allowed them to afford a better property in a preferred suburb.
Grönum says they identified a need to become more “customer-centric” and translate the home-buying journey into “bite-sized chips” to help consumers prepare and better understand the process they are embarking on. “The Homeowner App is a digital tool that guides consumers through the home-buying journey, with other ways to engage like loyalty bond rewards and YouTube videos.”
Before the National Credit Act (NCA) of 2007, repayment-to-income was a popular tool that credit providers used to get an understanding of a customer’s affordability.
A figure of 30% of a person’s income was commonly taken to calculate the maximum amount an applicant could qualify for, but the report says it does not consider other credit commitments or monthly expenditure, which could differ from buyer to buyer. “Now the new Credit Act requires an understanding of a customer’s income and adds a detailed analysis of other credit commitments and living expenses. The result of this calculation is a net disposable income, which could be used to determine affordability.”
Affordability is a complex subject that poses significant challenges to the pre-buying and searching phases of the homeowner journey, say Grönum.
Although the concept of affordability is seemingly easily understood, the report highlights that it is often poorly understood and "leads to anxiety as well as inefficiency in the pre-buying and property searching phases" - potentially placing the consumer’s financial wellbeing at risk. "Often, aspiring buyers apply for home loans without fully understanding or disclosing financial commitments, and without grasping the full impact that the monthly instalments and running costs could potentially have on their financial welfare."
“People spend a lot of time searching for property, only to realise they do not qualify for the home loan or the full amount they need,” says Grönum. This also has the effect of wasting the seller’s and estate agent’s time, making the sales process less efficient.
HANDY TIP : TO CALCULATE A BOND REPAYMENT:
Loan amount x 9.32 / 1000 = bond instalment amount
(Calculating @ bond rate of 9.50% over 20years)
To determine what income should be sufficient to qualify
Bond repayment x 34% = Gross income
Bear in mind, this is only one leg of the qualifying process,
the most important second leg is the net income less monthly expenses to determine surplus for new bond instalment
Absa has 5 tips for aspiring homeowners:
1. Buy within your means - if your income fluctuates, be realistic about what you can afford, and especially consider those months when your income will be lower.
2. Have a detailed budget, review your bank statements and add up all your expenses - consider expenses, big and small, and don't forget those due annually or quarterly.
3. Always be realistic, open and honest - not being able to afford your home loan instalment has much worse consequences.
4. Use available tools and get expert advice - use online digital tools and talk to a home loans consultant, private banker or mortgage origination consultant.
Source: ABSA