Cape Town - New home buyers have borrowed less and less relative to their income since 2006, despite cheaper debt, research by Standard Bank shows.
"We conclude that structurally, based on the Loan-to-Income Index (LTI), a median first-time buyer now borrows less than a decade ago, thus reducing mortgage indebtedness," explained Standard Bank economist Siphamandla Mkhwanazi.
However, consumers are facing significant cyclical pressures and are being called upon to raise bigger deposits - which takes a long time to save for due to first-time buyers’ low savings capacity under slowing economic growth.
"The cumulative 200 basis points interest rate hike since January 2014 has increased mortgage payments by about R1 000 per month thus reducing new home buyers’ disposable income - thereby adding to the cyclical pressures already faced by these consumers," said Mkhwanazi.
Standard Bank’s LTI has declined by 12 percentage points in the past decade. This is partly due to improved affordability, but mainly due to tighter lending standards in the past decade, responding to relatively tighter financial conditions, Mkhwanazi.
"The LTI depicts cyclical elements to lending criteria and individuals’ borrowing patterns. We expect the cyclical deleveraging to continue as financial conditions tighten and banks reduce risk exposure," said Mkhwanazi.
SA households have deleveraged in the past decade. The debt-to-disposable income ratio averaged 78% in 2015, compared to 86% in 2008. Mortgage indebtedness - defined as mortgage advances as a proportion of disposable income - declined over the same period, from a high of 51% in 2007 to 38% in 2015.
"We find that the Standard Bank’s Deposits Index is cyclical. It rises with slowing economic growth and with rising interest rates. In the last downward phase of business cycle, it appears that deposits lagged interest rates, whereas deposits lead interest rates in the current cycle," explained Mkhwanazi.
Standard Bank’s Deposits Index has been rising since around Q3 2013, prior to SA entering into the current downward phase of the cycle in December 2013. Currently, the value of a deposit on a median home for first-time buyers is 9.6 times or 860% more than it was at its trough in Q3:13, and increasing commensurately with the prevailing low growth climate and rising interest rates. This is, however, still well below the peak of 7.4 reached in the previous downward phase.
"Taking the ratio of deposits to median income, we find that a median first-time buyer requires a deposit equivalent to 1.7 months’ disposable income. Although rising, it is still below 3.2 months of disposable income reached in Q1 2009 during the global financial crisis," said Mkhwanazi.