Banks ease up on lending criteria

Over the past few weeks South Africans have breathed a small sigh of relief as banks have begun easing up on stringent borrowing criteria for home loans.

It is widely accepted that, in international terms, South African banks have been admirably stable and in a strong position. When banks were faced with increased levels of bad debt coupled with a quickly decelerating property market they naturally became skittish and tightened up on lending. But now, some banks are prepared to take on new ’low-risk‘customers and provide 100% property loans and more.

A number of opinion leaders in the property game believe that the South African property market will see an influx of new buyers due to the decisions that banks have made with regards to the easing up of lending criteria.

John Loos, Property Strategist at First National Bank (FNB), believes that the decisions made on lending criteria will sustain the increasing influx of buyers to the market that was started by interest rate reductions earlier this year. ‘’However, I think we must not expect too much. Firstly, I suspect that 100% loans will remain the minority of loans granted by the banking sector. Secondly the household sector remains under significant financial pressure, is still highly indebted, and cannot respond nearly as aggressively as it did to the rate cuts in 1999 and again in 2003. So the expectation remains for a modest recovery in residential demand.’’

Rael Levitt, CEO of Alliance Group, feels that international and local property sales activity have been weakened by constrained lending. ‘’One must remember that the property market was driven up by easy lending on the part of banks and what fuelled the downturn was the inability of many potential purchasers to raise funding on the back of the global liquidity crisis. One of the biggest drivers of a property market recovery is bank lending and the recent announcements will see a marked increase in new buyers.’’

Absa has now started to grant 110% home loans which are applicable to applicants who have a combined household income of R11 000 per month. The additional 10% is provided to assist with expenses such as bond registration and transfer costs as well as moving costs. Comments Jacques du Toit, Senior Property Analyst at Absa Home Loans: ‘’The decision to ease up on borrowing criteria will lend some further support to the market on the back of the downward trend in interest rates over the past number of months. Easier home loan lending criteria will probably make it more affordable for people who are in the market to buy property.’’

‘’Banks have realised that property prices have dropped and that it is a smart business decision to ease lending and start building their home loans books again,’’ adds Levitt.

Banks are suggesting that the residential market is past the worst and the only trajectory is now upwards. Du Toit believes that the property market seems to show signs of turning around, with year-on-year house price deflation slowing down and prices already rising on a month-on-month basis. ‘’Activity levels in the property market are expected to pick up, especially from late this year/early 2010.’’

The combination of economic improvement and rate cuts led FNB to believe that the worst of house price deflation had probably taken place, thus paving the way for mild relaxation on loan-to-value limits (i.e. lower deposit requirements). Loos believes that this will benefit the property market and economic growth mildly. ‘’I suspect a return to positive growth in the order of 1-2% (GDP) and single digit house price inflation in 2010. This is a realistic expectation given that the likes of the US economy have some major structural imbalances to sort out over the next few years, and as a result, weak global growth is expected to constrain South Africa. We remain cautious and probably will for some time until there are far more convincing signs that the global and domestic economies are back on a firmer footing.’’

The bottom line is that the banks’ move to relax deposit requirements is a positive for prospective homebuyers, for the property market and the general South African economy. Comments Levitt: ‘’Easier lending, coupled with improved affordability, thanks to lower interest rates, has already helped kick-start the local property market. We have seen an improvement in the performance at our auctions around the country and with consistent increases in values, we expect continued positive results going forward. We believe that the worst is behind us and that the property market is on the road to recovery. At the heart of the current recession has been the weak residential property market and if this market improves, it may well be the catalyst for a quicker recovery in all sectors.’’