Tuesday, 31 May 2011

Are banks 'killing' the Property Market?

Has it ever struck you just how many people are property experts when you mention that you are thinking of buying or selling a property?

These well-meaning advisers – with opinions that are certainly influenced more by hearsay than knowledge – will say that now is not the time to be involved in the property sector and, as a rule of thumb, they think they’re right.

People with a little more knowledge, like estate agents, will say it’s an excellent time to buy but, if you want to sell, make sure that you’ve priced your house correctly, particularly if it falls into the upper price brackets.

Do estate agents give you a true value? Never. They give you a ‘gut-instinct’ based value that is determined by what you want and what they think they can get. If the house is slow to move, then the price is too high. It’s a pathetic basis for determining a true value.

Bankers (responsible for lending the money) often won’t say a word – except among friends. And the sad fact of the matter is that bankers are the ones who dictate the state of the property market. If they lend money, sales boom. If they don’t sales dwindle.

In years gone by, when the cyclical swings were not as great as they appear to be today, banks would look for value in a property and would grant a bond based on the value that they attributed to it.

You would expect that pattern to be cast in stone and that, today, if you were to go to four different banks, you would get a very similar valuation from all four of them.

And that’s where you’d be so wrong. Different banks have different criteria and they use different yardsticks to adjudicate value. Ask for a value from a banker and you’ll get four very different ones.

This, naturally enough, makes it incredibly difficult for property owners and for estate agents who, for instance, put in an application for a bond (based on a fair purchase price) to all four of the banks and find that some banks come back and say there is “insufficient value” in the property to the grant the bond amount applied for.

The more expensive the home, the greater variation there is. And much of that valuation process appears to be purely subjective rather than scientific.

Question a bank about the details of why the value is so low and they will come up with all sorts of subjective reasons: “It’s not the right property to be buying in this market” or “The property is over-priced for the area” or “The owners have over-capitalised and want too much money” or the “The asking price is simply too high for the home” or, mostly importantly “We won’t grant a loan of that size against that property”..

Forget the fact that the buyer has a right to decide what amount he or she is prepared to pay for the property in question. Forget the fact that the bank won’t pay a penny of the excessively exorbitant interest rates that are calculated over the next 20 or 25 years. That’s the buyer’s responsibility.

Just remember banks borrow money from the Reserve Bank at 5,5% and charge the money they’ve borrowed at prime of 9% so banks make 3,5% gratis before lending a bean. It’s iniquitous.

If that’s not bad enough then we have the other factor: banks can now stipulate what a house is worth by making a snap, subjective and often unfair value judgment.

I watched one of these valuers at work on the property that I currently rent. He had a measuring tape (on wheels to calculate the perimeter of the house) that he wheeled past the plants (not next to the house) to give him a rough idea of the outer boundary.

Then he walked through the house, taking no more than five minutes to survey the lot. Then he swaggered through to my office demanding that I drop what I’m doing and immediately let him out.

If he was here for five minutes then that was a lot.

I went outside with him and waited next to his run-down white jalopy while he searched for an address in a map book.

After I had spent more time looking at him than he had spent looking at my house, I tapped on his window and said, rather sharply, “Listen, bud, I’m busy so why don’t you leave find directions somewhere else rather than just wasting my time.”

He drove away mumbling – and I didn’t give a fig.

His few minutes here resulted in a decision worth more than a million rand. It’s totally absurd and certainly a deeply unprofessional way to determine the value of a property.

His visit was typical of all those others I have experienced when valuators come to value a house. In the course of my lifetime I have bought and sold more than 20 properties and I have never had a different experience from a bank’s valuation man.

So I was hardly surprised to read the comments from Ronald Ennik, an executive director of Leapfrog Property Group who says that banks are damaging the property market by continuing to value properties “too conservatively”.

He’s quite right. I would take it further than Ennik did: I would say that banks are killing the property market and they seem to be doing so with a smile on their corporate faces and it makes me sick.

Apart from making it really hard to qualify for a bond, the banks are now deciding the value of property and what it’s worth. How unfair is that?

Homebuyers’ dreams are smashed by a cretin who spends less than ten minutes looking at a property. The same cretin who cannot even read directions in a map book.

And the bank he represents accepts his word as gospel – the final say on what a property is worth. It’s bizarre.

Surely there must be a less subjective way of determining property values?

Professional land valuers (like my cousin) will tell you that there is a lot more that goes into compiling an accurate and realistic property value than just wandering around with a tape measure and a pair of reasonable eyes.

And it is these professionals that should be doing the valuations for banks and it is their figures that should be the basis for any bond regardless of which bank it is that’s granting the money.

Property values must surely be based on measurable criteria and not on value judgments. Value judgments are not a valuation, they’re a guess. And I wish that Standard, Absa, Nedbank and FNB would remember that.

And then stick to lending money based on the risk profile of the individual and not on whether they approve of the purchase he or she is making.

I also wish that Capitec and African Bank (and others) would step into the market and shake it up completely by adopting a more fair and reasonable approach.

Because as things go mortgage-lending banks are just a very motley bunch.

*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn’t pretend to be facts or advice.

Tuesday, 24 May 2011

Home Buyers to spend HALF of take-home pay on their Mortgage

Economists said there is ‘no doubt’ that Bank of England interest rates will return to around 5 per cent - possibly even higher - from their current historic low of just 0.5 per cent.

If the current profit margins are maintained, it means mortgage rates will be pushed up to 8 per cent, according to Capital Economics.

It would see mortgage payments at the start of a new mortgage increase from 34 per cent of average take-home pay to 51 per cent for those buying a new home, it said.

It equates to more than £12,000 being spend on their annual mortgage repayments, as the figures are based on average take-pay home of £23,800 - or a gross salary of £31,500.

For existing borrowers – including those remortgaging – it will reach a record 42 per cent or £10,000.

Paul Diggle, an economist at Capital Economics, said: “The record level of outstanding mortgage debt relative to earnings suggests that existing mortgage borrowers would fare even worse relative to historical norms.

“And with the share of outstanding mortgages on variable rates of interest the highest in at least a decade, there is good reason to think that a sustained tightening in monetary policy would be passed on to borrowers quickly and in full.

“Were average mortgage interest rates for existing borrowers to reach 8 per cent, their average mortgage payments would rise to an all-time high of 42 per cent of take-home pay.

“Yet the additional interest rate risk that variable rates expose borrowers to can be overstated. The fact that most fixed rate periods in the UK are just two or three years long means that even most borrowers on fixed rates are exposed to a high degree of interest rate risk.”

However, he added the Bank Rate is likely to remain at its current level during this year and next.

“If that happens, it would no doubt add to the pressures on mortgage borrowers, but the house price correction that we expect over the coming years will be driven largely by the deteriorating labour market and the sheer unaffordability of housing,” he said.

It comes amid a rise in the number of people being evicted from their homes as lenders warn they will not be as tolerant about borrowers failing to keep up with their mortgage payments.

Earlier this month, the Council of Mortgage Lenders said 9,100 people had their homes repossessed during the first three months of 2011, up from 7,900 during the last three months of last year.

During the recession, lenders were told by the Government to use repossession only as last resort. But as the Government’s austerity measures take hold amid possible rises in interest rates, more home owners are expected to fail behind in their loan repayments.

Generation X leads property recovery

Generation X will lead the property market to recovery in the US and in SA. A more positive sentiment has returned to the market in the US as well as in South Africa, especially among professionals who can afford to take advantage of the current market conditions.

A report by an American company, John Burns Real Estate Consulting, revealed that of the 10 000 buyers and potential buyers they surveyed in 27 metro areas throughout the US, between 85% and 89% said that they felt now was a good time to buy a home and most felt optimistic about a new home purchase.

There has been a marked increase in activity in both the local and international property markets in the first quarter of 2011; however recovery in the global market continues to be slow as countries are experiencing different rates of recovery depending on the various economic policies they have in place.

In the US market, for example, the unemployment rate has reduced and the US stock exchange has rebounded massively since 2009. Positive property statistics have been reported with an increase in transaction volumes, especially in existing home sales and there continues to be a strong demand for distressed properties.

As with the case in the US, South Africans are currently seeing more realistic property pricing and are experiencing the lowest interest rate in the last 38 years. This has had an influence on the market and has contributed positively to the increase in property transactions. Added to this, realistic house prices and interest rates have also opened up the property market to people who could not afford to buy a house five years ago.

Around the world the Generation X population, which consists of adults between the ages of 31 and 45 who are generally well established in their careers, are looking to get their foot in the property-ownership door. According to real estate experts, these potential property buyers are most likely to decide that given the current market conditions, now is a good time to purchase a property. The Generation X market segment makes up 32% of the property-buying population in the US. While they are not the largest population-buying group, they are definitely the most active. In contrast Baby Boomers in the US, who make up 41% of the property-buying population, are still trying to make up losses in their savings and investments due to the recession conditions of the last few years and are more cautious in their buying decisions.

Statistically the population demographic in South Africa looks slightly different; Baby Boomers make up a much smaller percentage of the population than Generation X. Between the years 1950 and 1965 there were 13,5 million births in South Africa (Baby Boomers) compared with the 18,74 million births (Generation X) between 1965 and 1985.

However, when it comes to buying population, South Africa has many similarities to the US. According to John Loos, FNB Home Loan Strategist, the most noticeable increase in the property market buying share in South Africa was among the Generation X group who made up 28,1% of the total purchases in the first quarter of this year. This is compared to the Baby Boomers whose buying share increased to 21.17% of the total purchases in the first quarter of this year.

Younger buyers have also made their mark on the property market recently and it seems that Generation Y will not be outdone by their predecessors. Loos says that information from Deeds Office data on individual transactions revealed that in the last four quarters, 15.3% of first time buyers were under the age of 30.

Overall market confidence has improved and we have seen a higher number of first time buyers in the first quarter of 2011 than during the last quarter of 2010. It is clear that it is the younger professionals who are leading the property market recovery both in South Africa and abroad. Although we may still have an interesting road ahead of us in terms of full market recovery, things are definitely looking up for property markets around the world.

*Peter Gilmour is the Chairman of RE/MAX of Southern Africa