FNB’s decision to stop issuing any bonds at sub-prime rates will probably be followed by the other banks – but this is not a death blow to the residential property market, says Anton du Plessis, CEO of the Cape Peninsula estate agency, Vineyard Estates.
“Right now,” he said, “the rates are low enough to promote a lively housing market. The problem is not the interest rate levels but the high number of mortgage bond applications that are still rejected, especially at the lower end of the market.”
In upper middle and upper bracket housing (on which his company focuses), said du Plessis, the average bond is around R3 million. At a sub-prime rate of 1% below prime, (i.e. 8%) this would mean that the borrower would pay approximately R25 000 per month. If, as seems likely, he could only get prime, he would be paying R27 000, approximately R2 000 more per month.
“In the market I serve that would generally not be a problem to most buyers,” said du Plessis.
Asked if buyers at the lower end of the market would not be seriously affected by a 0,5% or 1% rise in their rates, du Plessis said that almost no borrowers at this level were granted sub-prime rates, so their situation has not been changed by the new ruling.
“It has to be added,” he said, “that although a lack of bond finance has been the limiting factor on house sales, this is not as serious a problem in the upper middle and upper brackets as it is in the lower markets.. In general, the potential buyers with whom companies like Vineyard Estates deals have good credit records, and are in good standing with their banks: over 80% therefore do get bonds without undue fuss, especially if they work through a good bond originator and can manage a 10 0r 20% deposit.”
Psychologically, said du Plessis, the cancellation of sub-prime lending may give a negative message to potential property buyers.
“It might in some quarters be interpreted as an indication that the banks still see residential property as high risk. All the evidence available points to the opposite conclusion – property remains a safe long term investment – but market sentiment might react to the bank ruling negatively.”