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Many members of the Property Investor Network have expressed their concern with the newspaper headlines surrounding the NCA and also the fact that several banks seems to have suffered as a result.
To better understand the effect and bigger picture, let's look briefly at the situations in other leading property markets, such as the US and UK. This will help put a perspective on the South African market.
Clearly, in the mature mortgage markets, led by the UK and USA, as
the property markets have become more and more highly leveraged, banks
have had to constantly look at the terms and conditions on which they
lend – and like any business they are under pressure to increase sales.
This has led to self certified bonds, buy to let bonds with just
100% and even at times no rental coverage requirements, and bonds based
on 6-8 times people’s salaries or over 30+ years; in other words
stretching lending criteria to the limits in certain areas of the
market.
As long as house prices rise this is fine, as repossessions will
save the money lent by the banks in the even of problems. Buyers who
are unable to service bonds are not a cause for concern because, in an
up market, banks can be assured of repossession and the ability to sell
the property at value greater than the outstanding bond amount.
However, as the US property market wobbles, some market areas have
experienced falls in property values of up to 15-20% - (primarily in
the speculative markets). This obviously results in bankd repossessions
where the bankers sit with properties that are valued at less than the
bonds taken out on them. Not a very good situation to be in.
It is said that in the US the areas that have suffered the most were
the sub prime markets where lenders looking to increase their business
had lent too easily. It appears that extensive credit was given to
people with already poor credit histories. Another, known factor is
that in the US the banks do lend to people with poor credit history.
Will this happen in South Africa?
There has already been panic about the state of the property market due to the NCA and increase of interest rates.
Though
selling credit in South Africa has become a trend so dangerous that the
NCA had to be instated. The mortgage lending business in South Africa
still conducts itself in a very conservative manner. Mortgages have
never been liberally provided to just anyone at any house price without
evaluation. Prior to the NCA, bankers regularly declined to give people
mortgages based on factors such as affordability or poor credit history
or simple because the asking price was much greater than the value of
the property.
he South African mortgage market is not as mature
as that of the US and the UK markets. As a result there is much scope
for growth in the industry and much elasticity remaining in many
household disposable income. So the market is not as saturated, mature
or over exposed as the US and UK.
The NCA may have caused many
problems in the credit market. It may take a few years for us to fully
understand and see the impacts thereof. However, the additional
responsibilities and regulation placed on lenders, may also have put in
place the checks to saved South Africa from a similar fate as the US in
the property market in the long term.
With the lending being at
all time high in South Africa, if the NCA did not exist or come into
affect when it did, who knows, maybe South Africa would have ended up
in the same boat as the US, with over extended buyers and mortgage
bonds far above property values. The verdict is still out on whether or
not the NCA has been a good or bad thing for the country.
This article was featured on Property24: Does the NCA benefit the property market?
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