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IT’S TIME TO BE A FOX ( Part 2)

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Our previous blog ” It’s time to be a fox” looked at the concept of hedgehogs and foxes. In this blog, we suggest some assertive behavior for the next period of our economic cycle.

But firstly, let’s reiterate. Hedgehogs

  • know one big thing
  • see the world through a filter of one big idea
  • stretch the idea and build data around it
  • are confident to predict and make many of them
  • drum on about the “tried and tested” formula
  • love complexity
  • are better in stable environments.

Foxes:

  • know many things
  • gather information from a wide spectrum of inspiration and sources
  • are self-critical and update their beliefs when faced with contrary information
  • are cautious about predictions
  • look for a new idea if something is not working
  • drive out with simplicity
  • are better in rapidly changing environments.

With that reminder, we are approaching rapids in our economy. That may sound like “one big idea” but it certainly is the consensus view of many writers at the moment. Just reading JP Landman’s article, Coming to a Standstill, dated 9 September 2015, he states that electricity and strikes initiated the SA growth problem, but these factors have been exacerbated by lack of confidence, a growing chasm between the public and private sectors, and a incoordination in key growth sectors. The SARB has also revised growth predictions and raised interest rates right into the headwind of a deteriorating economy in order to deal inflation. Not pretty at the moment, I’m afraid.

So what should you be, a fox or a hedgehog? We’ve been there before and survived, is a real hedgehog statement. You should’ve been around in 2008 to 2010, is another. Alles sal regkom, is a grand old hedgehog statement, loaded with stoicism and sense of duty. May I put to you that there is another way and explore the alternative.

The Foxy thing to do is to

  1. Review your business Good times layer in costs and make income assumptions. As for costs, scan every cost in your business and eradicate what even smells of complacency. As a radical move, you may wish to signal this effort to your people – stop the cake on Friday, change the coffee brand; just do something that makes everyone aware that times have changed.
  2. Review your activities – Golf on Wednesdays is really cool but stopping it will give you 6 good hours of extra work. And the message for your people will go without saying – news will get around. Start every day with a 2-Do List. Know what is optional and what must be achieved today, without exception. Follow-up on outstanding payments – years in business have taught me that “your best client [read, friend] will always pay you” probably means he is battling to pay. The other poor souls have already passed that point and you need to be the one creditor who collects. In property, chase up registrations and outstanding mandates. Remember management control is: Setting standards, Measurement, Evaluation, Correction or Reward and a Feedback Loop. Nothing short of that journey, is Control. Don’t delegate control if you’re accountable – by the time “your bank account tells you” it could be too late.
  3. Accept a Lower Standard of Living but not a Lowering of Standards: You can be poor but you don’t have to be dirty. Values drive behaviour and the values in your firm can leave space for facing the negative reality in the bad times, but not for excuses. You cannot create motivation but you certainly can channel it. Don’t allow your people to become de-motivated. There is a process of excellence in the business that needs to be maintained; maintain it. Customers certainly don’t need to know if you’re responsibly dealing with lowered economic growth. Stand up when answering the phone, convey positivity in your voice and your eyes, remain solutions-orientated and think possibility – there is nothing like sticking your chest out and tilting your chin upwards to make bad vibes go away. Remember your brain doesn’t know if you’re imagining or telling the truth when you decide to be positive in the face of circumstances. Imagination rules your world.
  4. Hunt for business: I have sat in airports recently reading the newspaper. I have even read the latest RW Johnson book and I am convinced that the day you believe it’s over, it is. Hunt for business. If you don’t someone else will. Jack Welsh had a famous saying: “Take control of your life, or somebody else will.” How true! No excuses, just down-to-earth action. No half-jobs, just hard work. If you want to read the paper and believe that China is your road to success, then go and work somewhere else. Remember this, people don’t leave you when they leave; they leave you in their heads a long time before that. You wish they would leave when they “opt-out” because that would save you money. The problem is they leave after months of “trying”, hours of toxic conversation with others, and a couple of unhappy customers. Watch for it in the daily activities and attitudes. Root it out asap. On the other hand, where genuine efforts are made by those great people who are with you for the long-run, encourage them and build them up. Remind them that “this too will pass” and that Action Conquers Fear.
  5. Find Inspiration: Running a business is tiring and battling cashflow, exhausting. Find a friend, a confidante, to whom you can turn. Pray, read, take “me time”, breathe deeply – 10 out, 10 in – to relax and replenish your soul. You can only give what you have, and be who you are. It is fair to say that your people “don’t need their leader with sweat on their brow.”
  6. Change BEFORE it hurts: It is always written about for one simple reason, people change WHEN it hurts. It is so difficult to simulate adversity in a successful company. It feels treasonous to even speak about the need to alter course when the island of delight is right on course. But, change you must. Bill Gates puts it this way:

When your business is healthy, it is difficult to behave as if you are in a crisis. That is why one of the toughest parts of managing, especially in a high-tech business, is to recognise the need for change and make it while you still have a chance.

Lots more could be said on this subject. Truth is that this is not the only recession we have faced and we have come through. Whether or not there is fundamental difficulty in this one, remains to be seen. Chance is there is little you can do to change that. But for foxes, they take inspiration from many sources, they re-consider the tried-and-tested, they try-abandon-try until their possibility thinking becomes their reality and their “new normal” meets their definition of excellence despite changed circumstances. They encourage others. They trade in hope and they are merchants of good news, truthfully spoken. Their word is their bond and their people trust them.

Hedgehogs have a place as well. They may be the very calm in the storm your company needs right now. Their idea may be good despite not ever pretending to be the silver bullet. Like all people, make allowances for them to enrich your team.

Yours in Property.

Banks vs bond originators – Which offers a better deal on your home loan? ( Part 2)

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The Press has recently had another look at Originators vs Banks and the articles have become well-publicised. A link to the MONEYWEB Today article is  below for your convenience.

In my first blog of this 2-part series, I covered the history of the banks and their homeloan businesses culminating in the business model of homeloan consultants who called on estate agents and paid small commissions for their business. In 1999, the landscape changed again.

MortgageSA and PA Homeloans, [now, ooba and BetterLife] began to slog it out in the market and were later joined by the ex-NBS team in the form of Bond Choice. The three originators, made hay while the sun shone and decimated the bank homeloan sales forces. In this context, just a brief note on the so-called “love-hate relationship” between the banks and originators. Bear in mind, I express my personal views and, in doing so, fully accept that I may have people who disagree with me.

In 1999, if the banks wanted to retain their own dedicated sales forces into the market, then what they did was difficult to understand. Any amount the banks paid to the new originators that enabled the originators to pay the estate agents more than the banks’ 0-0.3% was destined to disintermediate the banks from their estate agent relationships. No profit-orientated business person would walk away from a higher homeloan introductory commission – the end of the bank homeloan consultant was in sight from the beginning. To keep it simple, let’s say the originator commission was 2%, then the originator could pay 1% [anything more than 0.3% was good enough] to the estate agent and keep 1% for their consultant, overheads and profit. Throw the dramatic property market upturn of 1999 to 2007 into the mix and the stage was set for massive change. If there is love-hate, the banks can be forgiven for giving away their direct right of access to the residential property market. No wonder they might feel aggrieved. By the way, the banks’ commercial property divisions did not follow their residential counterparts’ leads and to this day, have a small broker component with the majority of business coming directly.

On the other hand, what the originators did to the banks was unacceptable. One thing an originator cannot argue, morally or contractually, is that they do not take the risk of the homeloan. Controlled by onerous Banking legislation which incorporates capital and informational requirements, the banks proceed to approve the homeloan application and then administer it and its risk for the lifespan of the loan. Every event of the customer –  death, joblessness, errant credit behavior, over-indebtedness, interest rate increases – is felt by the bank and worked through for 20 to 30 years.

Let’s never forget that banks are fiduciary institutions and, as channels of the nation’s savings, bear responsibility to depositors to give them their money back with interest, and on time. I always say, a bank’s name is spelt, T-R-U-S-T. Break that and you break everything. In the light of this view, the behaviour of the originators was sometimes arrogant and demeaning to banks. All of us had a role to play in the response eventually taken by the banks to bring the industry into line. Just the practice of “shopping” to every bank willy-nilly was unacceptable. The average conversion rate of 18% was in poor taste and mathematically boiled down to 4 banks divided by four submissions of the same deal less NTU’s; plus-minus 25% – 7% = 18%. What a waste of admin capacity, time and money.

With these strong views as both a banker and an originator, I read the article below and make some pertinent comments in closing.

Banks deserve the utmost respect of the originators. They carry the risk for the lifetime of the homeloan in the face of increasing compliance legislation. Nothing or no one in origination should be allowed to treat this responsibility lightly.

In turn, banks benefit from a variable, once-off commission, or introductory fee if you prefer,  at a rate they have calculated over years and agreed contractually. Some points bear emphasis:

  • As a variable rate, the banks bear no overhead in the ongoing acquisition costs of the originator. They have effectively curtailed the fixed cost, fully absorbed nature of their homeloans’ acquisition. That’s good business.
  • The use of Comcorp and the originators’ own platforms radically reduce homeloan processing costs.
  • I contend that the current commissions paid to originators are not only variable but also less than the fixed cost, let alone the fully absorbed fixed cost, of acquisition for a bank. In this regard, it is no accident that insurance companies have long embraced the broker model and latterly only, the digital platforms, even in the face of their broker strategies.
  • Sensibly, a bank would outsource to a responsible origination force but for the relatively few customers who insist on dealing with bank-branded homeloan consultants in specific higher net worth channels.
  • The banks will never outsource their credit evaluation models. The seduction of lower costs is far outweighed by the risk of manipulation. On this front, banks’ fraud protection units are critical to combating this scourge in financial services. Regretfully, this stance will always mean a higher cost of delivery but no bank can be blamed for holding credit quality as sacrosanct to itself.
  • Origination exists because the banks want a secure, reasonably priced, variably-costed channel. In doing what they did with the average origination commission, the banks effectively stabilised the industry and made it sustainable.

 In turn, the originators have a compelling proposition. It is simply this:

  • The originators provide Choice in a financial services industry awash with options. Choice of product, institutions and interest rates. I am often asked if I “get the best rate” and my answer is No, I get the best credit terms. What I mean by that is, does a customer want Prime-0.5% with a 10% deposit, or Prime+0.5% without? That is Choice in action; the customer’s call. I have the chance as an originator to present such options repeatedly and from different banks.
  • The originators provide Convenience. At the offices of their agents, in the homes of their customers, over the phone with attorneys, linking with bank assessors – origination consultants do an incredible job Conveniently. Their costs are their responsibility and they are paid on success only – like estate agents, true entrepreneurs who start every month from scratch.
  • Originators are Experts. Because they only do homeloans, origination consultants, many of whom came from the banks in the first place, are steeped in homeloans. This expertise, coupled with close networks with principals, developers, conveyancers, assessors, bank representatives and insurance specialists, is brought to bear in the submission of the homeloan application. Such dedicated focus is rare in retail banking today. It’s quite correct, as one of the experts in the article below mentioned, that origination consultants have an excellent idea where to place a particular customer’s homeloan for best results.
  • As regards interest rates, I sense that customers are viewed by the banks for pricing in sophisticated pricing models and that little deviation occurs from it for the sake of an originator’s customer. On the other hand, I’m not convinced that customers get better rates by going direct – the full absorption cost of a bank would probably make sure of that. As a result, an originator’s ability to consistently get better rates for their customers will remain confidential to the banks with much annecdote around it. One thing is for sure though, a hungry, commission-driven originator consultant will fight tooth-and-nail for her customer.
  • Finally, the customer gets all this for Free. That’s the biggest factor in favour of the value proposition of origination. You don’t pay at a bank either if you go direct but the cost of time parking, in queues, the car guard and the paper trail all add up.

Now let me sum up. The history of homeloan acquisition is interesting and its evolution has netted for South Africa one of the most effective homeloan businesses in the world. The banks spawned origination when they bought the origination proposition. The originators have taken hard knocks to reach the point at which their industry is attractive  to the banks as viable and sustainable with acceptable credit and fraud risk in the process. It would seem, like many new industries, the origination industry has matured into a worthwhile business proposition and partnership with the banks.

Love-hate? I guess not. Partnership is more how I like to think it; built on mutual respect, a desire for long-term sustainability and cost effectiveness.

Here is the link to the article on Moneyweb – Banks vs bond originators – Which offers a better deal on your home loan?

Want to know more about the services Bond Originators offer, Get in Touch

 

Banks vs bond originators – Which offers a better deal on your home loan? ( Part 1)

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The Press has recently had another look at Originators vs Banks and the articles have become well-publicised. The MONEYWEB Today article is copied below for your convenience.

Looking at it and the articles received courtesy of ooba Marketing, I am excited again to write about the phenomenon called Origination. I will spill over into two articles.

I have an uncle who quotes: “Life without history is no life at all,” so let’s go back a little…

In 1999, origination began with an offer by Standard Bank to MortgageSA to pay a commission for completed bond applications. This event spurred the Property Association to become involved in the industry. In those days it was called Bond Broking but the word, Origination, was eventually adopted from the American term.

The Americans had a different means of origination which has never taken hold here and probably never will. In their case, Fanny Mae and Fanny Mac, their great executors of The American Dream, were established as the conduits of the Nation’s savings into home ownership.

We have much to thank the Americans for when it came to South Africans being brought up to believe that home ownership was an important step in “growing up”. “You need to buy a house”, your mother would tell you. In order to garner home loan applications that could be discounted into the companies, both Mae and Mac set up Originators and Servicers [two terms still used in the Securitization industry today].

The originators did what we do – called on the estate agents, completed the application and submitted it to the Servicer sometimes via the credit score of the company, or the Servicer did the credit approval. The Servicers captured the application and administered it for statements, arrears, upgrades and all payment calculations.  The point is that Mae and Mac both had similar models and outsourced their homeloan acquisition and servicing to Originators and Servicers. In this model lay the seeds of the disgusting practice of black-box finance that eventually lead to the Sub-prime crisis that brought much of the World’s economy to its knees in 2008-2010.

What the originators and servicers did was reason that it was silly to administer home loans one at a time when you could package them as a portfolio of risk and then just sell them in billions of Dollars at a time to banks, and Mae and Mac. The premise was simple, “you can’t lose on property” so who cares about affordability, you just repossess the house and get your money back.

Problem is that when lots of houses come back at the same time, property prices collapse. Then the financiers, wooed [greed was alive and well] by market share and interest earnings, took away deposits and over-lent on properties. 30 year fixed rates at less than 3% were marketed so you were crazy not to borrow against your house. What mayhem followed! Our banks over-reacted though as the tsunami of negative sub-prime sentiment swept across the finance world and, in many ways, changed the landscape of mortgage finance completely. By the way, “sub-prime” does not mean “less than Prime interest rate”, but rather it is the term given to assets in a portfolio which are “less than their best” ie “below being “prime” assets in value”.

So why do I say “has never taken hold here and probably never will”? Our banks are multi-product institutions which are fully integrated from an administrative point of view. They do not need Servicers as their Operations departments are effective and efficient in multi-product administration and, legally, it would be very difficult and unacceptable, for our banks to sub-contract affordability which has now become law through the National Credit Act.

I remember once talking on World Report, a global BBC phone-in programmer, and being slated by an American guy who described SA as a nanny state because we have affordability guidelines and laws that govern how credit can be lent. Shame for him, as two things saved us in Sub-prime, one was that we have always been strict on affordability and the second, that we never conducted black-box securitisation in SA and were somewhat restricted from investing in such homeloan portfolios by our foreign exchange regulations. Thank Goodness!

Back to local history. In the 1960’s bank capital was scarce and the South African Reserve Bank held tight reigns on the banks and building societies. At that time, estate agents brought their completed bond applications to the Building Societies’ branch managers and then vied for the available capital of the day. I can even recall my Dad selling a house in Amanzimtoti and giving his buyer a “collateral” bond. This meant that the seller forfeited some of his sale price, 5 or 10%, to help the building society with capital to finance the bond for the buyer. This process revolutionised with the demise of the Building Societies Act and the modern Banks Act in 1973.

Banks could then more freely access capital and began to do their own homeloans – ABSA and Nedcor were born out of this huge change in legislation. It took Dr Theo Wasserman, CEO Trust Bank, to change the bond acquisition landscape for keeps. He decided to deploy smart looking “home loan consultants” to call on estate agents and canvas business. Their claim to fame was simple: “We come to you and take all the paperwork away.” No self-respecting estate agent would say no to that  and so the other banks followed suit and home loan sales forces were born. It truly was a brilliant move by Trust Bank which was, as you know, eventually absorbed into ABSA. The consultant salesforce model prospered right up to 2000 and were eventually paying between 0-0.3% for bonds for their respective banks.

Now that I have completed dated myself, let me conclude this first blog post saying that the love-hate relationship purported between the banks and the originators has been fantastic for the home loan industry in South Africa. More on that next week……….

Here is the link to the article on Moneyweb – Banks vs bond originators – Which offers a better deal on your home loan?

Want to know more about the services Bond Originators offer, Get in Touch

Nepal earthquake, a stark reminder of how crucial Home Owners Cover is

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I have had a Son and his two friends in Nepal for the last 2 weeks. He was two days out of Katmandu when the earthquake struck and two days shy of Everest Base Camp when the avalanche fell. Needless to say, it has been a long two weeks for my wife and I. The good news is that he and his friends are safe in Kat at the moment waiting for their flight out tomorrow.

But all this earthquake talk started my thinking about our insurance cover. Fortunately we don’t have many earthquakes of any size at all and just now and again have tremors to remind us of Mother Nature. We have however, had recent fires in Cape Town that destroyed some beautiful properties.

Fires were in fact the start of what we now know as Comprehensive Insurance, in the 19th Century. Today it includes our household contents and cars mainly. In particular though, is Home Owners Cover [HOC] which is at the heart of what we probably call natural disasters.

The good news is that if you have HOC, you are covered for what are called Fire and Allied Perils which includes damage caused by Fire, Wind, Water, Storm and, thankfully, Earthquake including its cousins, Mudslides and Avalanches. [On a side note, one wonders how many of those poor people in Nepal have HOC]. You can check your policy, but this cover is a general rule for all policies in South Africa as it emanates from the fires that were prevalent in wood-built cities of old.

Some policies may have conditions that you need to understand. For instance, a house in a known flood plain may be refused HOC cover for Water or the owners may have to pay an excess to their premium for such cover. Some policies may insist that the construction of a building is such that it is engineered to withstand a 5-plus earthquake. It’s not a bad idea to understand your policy wording to be very sure of what is included or specifically excluded.

The crux of this conversation has two angles:

–   Firstly,  get insured for HOC as you should be for contents and cars. Do not delay, the loss you could take in a fire is unbelievable and they do happen. When your bank has a bond over your house, this is a general rule. You probably are insured per course with the bank but may have your own insurance. In the latter case, the bank insists that you let them know that you are still insured once a year or they will reinstate your policy at your cost and include the payment in the bond payment. Bottomline, they have a right to insist, as the bond holder, that you are and remain insured.

–   Secondly, make sure your insurance is for the right amount. This amount is the replacement value of your home. Find out from estate agents what your home is worth in the market and ask them if that estimate is close to replacement value. Things change over time and replacement from older areas can be far more expensive than you imagine. Please don’t delay.

Some final thoughts. Often you’ll read that only 30% of cars in South Africa are insured; that’s staggering and not good news for anybody. In turn, house under-valuation is an ongoing problem for insurers. You should also be clear in a sectional title development that your Body Corporate is representing values correctly. Ask your chairperson of the BC to show you the latest policy and values for your unit. As regards Subsidence and Landslip cover this can be a nightmare. Simply, if your retaining wall falls over who pays – once again, be certain that there walls are valued and covered in your HOC. The same goes for sinkholes – make sure you understand your cover.

Our experience in Nepal has alerted us deeply to the things in life that are precious and worthwhile. Homeloan Junction cares about your home and your family way beyond getting your bond approved. That’s why we write these blogs with useful and hopefully, compelling information. Check out your policy and its cover; you may be very grateful you did.

Get in touch with us if you have any questions  on this, or anything relating to home ownership.

Yours in Property.

The Transfer [Conveyancing] process

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There are essentially two contract processes that enable you to buy a property, whether residential  [our main focus in this article] or commercial.. These are the Bond Registration process and the Transfer [Conveyancing] process.

We covered the Registration process in our last article. Remember what is happening here in the Transfer [Conveyancing] process is that a qualified Transfer Attorney is assuring that the property is transferred from the Seller to the Buyer without any doubt as to ownership in the future.

Thanks to attorneys Yammin Hammond Inc. for their easy-to-understand Transfer [Conveyancing] process:

Transferring ownership of a property from the Seller to the Buyer (i.e. conveyancing) is a complicated and often misunderstood process. It involves a number of parties, many of whom have conflicting interests. All of them, however, have to coordinate their efforts to ensure that the documents arrive at the Deeds Office on the same day.

There are other parties, such as the Estate Agent, Mortgage Lender and Bond Originator, who have a financial interest in the transaction and often want it to be completed in the shortest possible time.

Understanding the sequence of events will help you monitor the process accurately and also give you an idea of the time remaining at each stage.

Below are some of the steps typically required to transfer a residential property. It has been written in simple language and illustrates the relationships between the various parties.Much of the jargon and key concepts are explained in the notes on the right hand side.

Step Description Notes
1. You sign an offer to purchase a house from the Seller using an Estate Agent

 

 The Sale Agreement (or Deed of Sale) is a binding contract between the Buyer and the Seller that forms the basis of the transaction.
2. You apply to the Bank for a loan or a Bond Originator applies on your behalf A bond application normally forms part of the “suspensive conditions”, i.e. events that need to happen before the sale is finalised. Another common suspensive condition is the sale of an existing property.
3. The Estate Agent sends the Sale Agreement to the Transferring Attorney The Sale Agreement (or Deed of Sale) is a binding contract between the Buyer and the Seller that forms the basis of the transaction.
4. The Transferring Attorney contacts the Seller’s bank and requests the original Title Deed and the cancellation figures If the Seller has a bond over the property, his/her bank will hold the Title Deed in safekeeping. The bank will also provide cancellation figures (or discharge costs), i.e. how much is required to settle the Seller’s bond.
5. Your bank instructs their attorney, the Bond Attorney, to register a Mortgage Bond A Mortgage Bond is a special loan which uses fixed property (e.g. a house) as security and it is registered in the Deeds Office.
6. The Seller’s bank instructs their attorney, the Cancellation Attorney, to cancel the Seller’s bond The Cancellation Attorney sends the Title Deed and guarantee requirements (i.e. the cancellation costs) to the Bond Attorney and the Transferring Attorney.
7. The Transferring Attorney requests a Rates Clearance Certificate from the Local Authority A property cannot be transferred if there are outstanding rates and taxes. The Transferring Attorney will also do a Deeds Office search at this stage to check the details of the property.
8. The Transferring Attorney assembles and prepares the documents This can take up to 3 weeks.
9. You will be called by the Transferring Attorney to come in and sign the documents You will be required to sign a Power of Attorney to Transfer as well as a number of affidavits to verify your marital status, financial status and identity. Remember to take your identity document and FICA documents.
10. You pay the transfer costs and your share of the rates and taxes You will be presented with a pro-forma account, which is an estimate of the costs. You will get a final account after registration when the actual costs are known. The costs vary because the date of registration is unknown at this stage and some of the costs are determined by this date. Note: The Seller will also pay his/her share of the rates and taxes at this time.
11. The Transferring Attorney instructs the Lodging Attorney to lodge the documents in the Deeds Office The Lodging Attorney is located near the Deeds Office and acts on behalf of the Transferring Attorney (who may be far away from the Deeds Office – even in another town).
12. The Lodging Attorney contacts the Cancellation Attorney and Bond Attorney to ensure the documents are lodged together on the same day The documents have to be registered at the same time because the Seller’s bank has guarantees that ensure it will be paid when their bond is cancelled and they are not prepared to cancel the bond until the new bond is registered.
13. The Deeds Office Examiner carefully checks all the documents This stage is called “on prep”. It can take between 7 – 10 working days depending on how busy the Deeds Office is.
14. The Deeds Office Examiner contacts the Lodging Attorney, Bond Attorney and Cancellation Attorney to inform them the documents are ready This stage is called “up for prep” or “up for fees”. It means the documents are all in order and they will be registered the next day.
15. The documents are registered The Buyer becomes the owner of the property and the Seller is paid out the net proceeds. The Estate Agent is paid their commission.
16. The Transferring Attorney sends the Title Deed to your bank It can take up to 3 months for the Deeds Office to send the Title Deed to the Attorneys. If you don’t have a bond, the Title Deed will be sent to you.

For more information on your Homeloans options, contact HomeLoan Junction Today!

 

The South African housing market has been somewhat buoyant. The question is: Will it remain so

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Expectations are that the SARB will leave interest rates unchanged at the MPC meeting on 26th March. This expectation follows on the heel of Governor Yelland’s indication that the United States Federal Reserve will not be raising interest rates soon in that country as inflation is very low ( less than 1%), and meaningful job recovery is still sought in the US economy. This news will no doubt help retain our trend.

According to FNB, the final quarter of 2014 saw South Africa’s Household Sector continuing to lower its vulnerability to debt-service cost “shocks”.

While still highly indebted and highly at risk, in 4th quarter 2014 South Africa’s Household Sector continued to gradually lower its vulnerability to any unwanted interest rate hiking surprises or economic shocks, by further lowering its Debt-to-Disposable Income Ratio. According to the South African Reserve Bank, a further decline in the Household Debt-to-Disposable Income Ratio, from a previous quarter’s revised 78.1% to 77.6% in the 4th Quarter of 2014. This brings the cumulative decline in the ratio since the early-2008 peak to 11.2 percentage points, which is significant.

All of this means that the Household Sector is moderately better positioned to weather an interest rate hiking “storm” this time around compared with 2008/9, due to its overall level of indebtedness being considerably lower these days compared to that period.

Another angle to take in answering the question is to look at buyers who are acquiring Buy-to-Let investments. The 1st quarter 2015 FNB Estate Agent Survey pointed to no further increase in the significance of buy-to-let buying in the market compared with the previous quarter. By this FNB means that, as a percentage of total home buying, buy-to-let purchases are estimated by estate agents who responded to the survey to have remained unchanged on the previous quarter at 9%, the 3rd successive quarter of this estimated percentage.

FNB believes this percentage trend is a healthy one, reflecting that the property market is not running away with itself as it did prior to 2008’s sub-Prime crisis. The percentage remains mediocre in comparison to the estimated 25% back in the boom times of early-2004. Household Sector Real Disposable Income (simply, what we put in our pockets) growth remains constrained by sustained weak economic growth for the foreseeable future, while Government taxes, fuel levies and statutory costs, like electricity, continue to rise.

In addition, the rental market’s performance in recent years has remained lacklustre. At low interest rates, people would rather try to buy their own property. In the Western Cape though, the value for money by renting often exceeds what similar payments per month on a bond could buy. In other words, rental returns are low compared with Gauteng.

Nevertheless, a stable buy-to-let percentage of total home buying should imply a gradual rise in the volumes of buy-to-let purchases, because we have seen gradually rising overall transaction volumes in the residential market in recent years.

Looking at 1st time homebuyers, the 1st Quarter 2015 FNB Estate Agent Survey once again returned a strong estimate of 1st time buying levels expressed as a percentage of total home buying, although a little down off the peak percentage of a few quarters ago. FNB believes that the mild decline may just point to a slow decline in home affordability that has appeared recently. Obviously, this would deteriorate quicker if interest rates were to rise.

According to the sample of agents FNB surveyed, 1st time buyers were estimated to be 25% of total home buyers. This is slightly lower than the 28% high of the 2nd quarter of 2014, and the percentage has now been lower than last year’s high point for 3 consecutive quarters, causing the smoothed trend line to point slightly downward. As before, FNB believes that the mild decline may just point to a slow decline in home affordability.

FNB has two very interesting indicators. FNB’s Home Affordability measures include the Average House Price/Average Labour Remuneration Ratio, as well as the 100% Instalment on an Average Home Loan/Average Labour Remuneration Ratio. In simple terms, these two indicators measure how affordable it would be for the man-in-the-street to buy a house and make the payments on the bond. These indicators started to rise in 2014 after prior years of decline because of the net result of house price inflation exceeding wage growth, and of course the minor interest rate hikes last year.

It would appear, too, that an increasing portion of 1st time buyers are indeed concerned about house price increases and affordability challenges, according to FNB. “Buyer Panic” refers to a state of mind where aspirant 1st time residential market entrants begin to fear that if they don’t buy a home quickly, the price levels will rise to levels where property becomes unaffordable for them. This can cause “inappropriately high” levels of 1st time buyers over-extending themselves financially as they attempt to get a foot in the property market “before it is too late”. This, in turn, can cause market “price bubbles”. FNB considers the market still appears to be far from this point but buyer panic must always be a concern where it exists.

So back to the question, Will the South African home market remain somewhat buoyant? It would appear from the above that the market is better than recent years but not over-heated or unreasonable in any of the residential property sectors. So, we will probably retain current growth levels for the foreseeable future.

A closing comment. Interest rates may not be the key determinant of home buying. There is a large dose of “Confidence” that comes into play. Think of it this way, when you buy a house you want to know it’s for keeps and your work circumstances are stable and certain. Fear of job loss, and a sense of uncertainty about the future could keep you renting.

Your mortgage bond is your best friend

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Obviously, you don’t feel like that right now. That monthly payment for “as long as you’ll live” feels interminable. And you’re hearing lots of news about inflation and rising interest rates. Then there’s all those other expenses that chew the rest of your monthly income.

But let’s look at things a little different and see some light at the end of the tunnel.

  1. Your mortgage bond gives you your primary place of residence. It pays for “home”. Your home is growing in value, slowly but surely. So, at some point in time, when your salary has risen and your bond has decreased you will have Equity in your house. That is a turning point in your wealth creation. Just by the way, I once said that your home is most peoples’ biggest asset and I was corrected. Your pension, for most people, is their biggest asset so look after it.
  2. When you have the spare cash monthly, pay extra on your bond. If I told you just a 10% increase in payment would save you 5  years [54 months to be precise], in payments. On a R1m bond over 20 years that equals R341662 in saving. Obviously, that gets better over a 30 year period and with more than 10% incremental payment. Can’t do it now? Then set the financial goal to force a saving of whatever you can afford.
  3. Remember, whatever you save earns tax free returns. The reason is simply that you save interest instead of paying interest and the bank earns less while you have a saving over the period.
  4. Obviously, there comes a point when your bond may be paid off. That’s a huge saving in monthly cashflow. Aim for it, it holds a hidden gem.
  5. At some stage, your equity or your paid off bond releases cashflow for an investment property. That’s an exciting prospect.

We’ll talk more about property investment in this blog, but aim in your portfolio to have a rented property or two when you retire. The great thing about it is that it is paid by somebody else. Of course, there are nightmare stories about tenants but there are many more about great returns from a tangible asset. What is most interesting about a rented property is that the mortgage bond, serving as an access facility, becomes your overdraft if you want it to be. Interest is tax deductible and the facility can be used for all sorts of luxury and wealth generating activities. For instance but not recommended, you can go overseas and repay the bond. Better still, you can buy a business or invest in other assets or another property by simply using the paid off rental property. It also helps that if a business doesn’t succeed, you have not risked your home in the process.

Property may not always be the best return in your portfolio. Many will also say that a property fund is the easiest way to invest in property – this blog does not disagree. But, for the sheer investment enjoyment of property, a buy-to-let investment is good to own and use.

 

 

Welcome to the Homeloan Junction Blog

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Starting a blog on property is daunting for me. There are so many great people out there with the most amazing knowledge of the property industry. In fact, I welcome their input into the blog as we proceed.

There are lots of articles  about swimming pools, maintenance and the need for it so as to retain value.

But I wanted to start at a point and compliment the role players in this industry. Those men and women, from labourers to billionaire owners, who wake up every day with a passion to drive property. In essence, what you provide is the residence for business, people and families. None of us would be comfortable and clean in the absence of a roof over our head and a bed and shower to use. Little matters more than housing and food to an individual.

The cycle begins with Developers who take the risk to provide housing. From the multi-million to the Affordable unit. Great risk and not always great reward. It was tragic in the sub-Prime crisis that the Banks withdrew finance to these developers – the suppliers of “housing to the nation”. In hindsight with the dust settled, it seems that we lost sight for a few years on the national asset of housing and couldn’t really see the crisis clearly. As we talk more, we will see that the environment has changed and now affordable housing is going up at an exponential rate.

Then the Estate Agents and their Principals. What an amazing group of people – frustrating to some sellers but nonetheless, the reason why 98% of our houses and factories are sold with contractual efficiency. I think they’re great and the few that upset, well, so be it. the firms that I know are professional to the nth degree and deliver as specialists.

To the Banks, Conveyancers and the Deeds Office, you are the glue ensuring finance and strong title in a world class manner.

Look forward to hearing from you in due course.

Jack@ Homeloan Junction