First-time home buyers now less reliant on mortgage debt than a decade ago

Standard Bank builds on their previous research (see Homes for first-time buyers are more affordable than a decade ago, published 21 June 2016) and assess how first-time buyers finance their homes. Standard Bank does this by tracking two mortgage debt metrics for a median first-time buyer: SBR’s Loan-to-Income Index and Deposit Index.

Main findings:

· Consistent with overall declining consumer indebtedness in SA, as evidenced by debt-to-disposable income and mortgage advances-to-disposable income ratios, we show that first-time buyers have borrowed decreasing amounts relative to their disposable income. As a result, mortgage indebtedness has improved structurally for first-time buyers despite cheaper debt over most of the study period. As at Q1:16, SBR’s Loan-to-Income Index for a first-time buyer was 12 percentage points lower than a decade ago.

· Further, Standard Bank shows cyclical elements to the way homes are financed. SBR’s Deposit Index shows that deposits rise when economic growth slows, and also when interest rate cycles are in a hiking phase as is currently the case (since December 2013). The index troughed at 0.5 in Q3:13 and is currently at 4.8. This is still below the peak of 7.4 in Q1:09.

· As a result, Standard Bank estimates that a median first-time buyer needs to raise 1.7 months’ worth of disposable income to fund a first home. The Deposit Index is currently rising due to slowing growth and rising interest rates but still better than its peak of 3.2 months’ disposable income during the global financial crisis.

·Analyzing the first-time home buyer’s wallet, Standard Bank finds that it would have taken a median first-time buyer approximately 19 months to save a deposit equivalent to 1.7 months’ disposable income (as required currently). This is due to first-time home buyers’ low savings capacity, aggravated by slowing economic growth. Comparatively, it would have taken 39 months during the global financial crisis, and just 2 months in Q2 2013 before SA entered the current downward phase of its business cycle.

· The fall in deposit required (to 2 months’ savings) is compatible with previous research which shows that Loan-to-Price Index rose significantly post global financial crisis to Q3:13.

· Affordability for first-time buyers is also under increasing pressure because of rising interest rates. The cumulative 200 bps rate hike since January 2014 has increased mortgage payment by about R1,000 p/m, thus reducing new home buyers’ probability of affording a mortgage.

Read more here: First time home buyers now less reliant on mortgage debt. 5 July