Research Residential

First-time homebuyers are taking advantage of investment property opportunities

Statistics released by ooba Home Loans for Q2 2023 reveal that while ten consecutive interest rate hikes since November 2021 have negatively impacted the volume of home loan applications in the market, they have not influenced the willingness of SA’s banks to continue to lend competitively.

According to CEO of ooba Home Loans, Rhys Dyer, homebuyers are still benefitting from competitive home loan deals with the home loan comparison service’s stats showing that the banks are still comfortable to offer 100% loans – with approval rates still sitting at over 80%.

As expected, property sales have slowed due to the high interest rate environment and challenging economic conditions and ooba’s stats point to a decline in the volume of home loan applications by 25% year-on-year between Q2 2022 and Q2 2023 and by 30% from the high in Q3 2021 when the prime lending rate was at a historical low of 7%.

The average price that ooba Home Loans customers are paying for property remains in a negative territory with the average purchase price for Q2 2023 down by -0.4% from Q2 2022 (from R1 431 712 to R1 426 656). The average purchase price recorded for first-time homebuyers in Q2 2023 was R1 120 173, -2.6% down on Q2 2022’s R1 150 256.

While banks continue to offer zero deposit home loans to homebuyers, ooba’s stats also show that homebuyers are prioritizing deposits with positive outcomes for their long-term savings and general affordability.

The size of the average deposit has grown from 7.5% of the purchase price in Q1 2023 to a sizeable 8.4% in Q2 2023 (R120 343). This signals that homebuyers are utilising their deposit to minimise their exposure to the effects of the increased interest rates and to ensure affordability of the properties they are purchasing,” continues Dyer.

And despite a decline in first-time homebuyer applications – now accounting for 46.5% in June 2023 (and 48.2% for Q2 2023) – down from its peak at 56.2% in May 2020, this valued segment still believes in the power of deposits. “Deposits now make up 9.6% of the purchase price (R107 917) for first-time homebuyers – a staggering 15.2% increase year-on-year.”

Banks continue to compete for homebuyers, as evidenced by a steady average successful approval rate with ooba Home Loan’s customers continuing to benefit from a high approval rate of 82.8% – unchanged from Q2 2022.

In addition, the approval rate for 100% loans is stabilising to just above 80% – rising to 81.9% in June 2023 from 80.2% in May 2023. “This removes some of the barriers to entry for homebuyers – particularly first-time homebuyers – who cannot afford to put down a deposit,” says Dyer.

However, it is interesting to note that the number of people declined by the first bank that they applied to has increased slightly from 33.6% in Q1 2023 to 34.6% in Q2 2023. “This is the effects of high interest rates coupled with the rising cost of living on applicants’ affordability profiles. Despite this, our approval rate remains higher than the previous quarter, highlighting the critical importance of receiving quotes from a number of banks when applying for a home loan.”

Despite the rate hikes and pressure on consumers, banks are still lending, and this should come as a confidence booster to many of us,” comments Dyer. “We are at the peak of the interest rate cycle which means that the homebuyers who can afford a home loan at the current interest rate are a good risk going forward.”

The banks’ competitiveness for a bigger share of the smaller home loans market is illustrated in the cheaper year-on-year average interest rate concession. “In Q2 2022, ooba Home Loans achieved an average rate below prime -0.30%, compared to the now improved average rate for Q2 2023 of -0.41% below prime.”

An increase in gross incomes nationally has led to homebuyers exercising their option to purchase investment properties. Based on ooba’s statistics, the gross income of all applicants during the first half of 2023, averaged R57 568. Interestingly, the gross income of first-time property investors was significantly higher – averaging R87 105 for the same period.

The income levels of first-time property investors has increased sharply in recent years from +9.8% in 2021 to +10.7% in 2022 and most recently to +15.9% in 2023. Coupled with this, the applications for investment or buy-to-rent properties rose sharply in June 2023 to a robust 10.9% of total applications nationally – the highest percentage recorded since February 2009.

The primary driver behind the national increase is the Western Cape, which saw applications for investment properties surge to 30.4% of total applications in the Western Cape in June, comfortably exceeding the previous high of 21.5% in March 2020. “Other regions recording stronger demand in the last month were the Free State (8.3% of applications) and the Northern Province (5.2%),” adds Dyer.

Surprisingly, the average price paid by first-time homebuyers for an investment or rental property has, in recent years, exceeded that of first-time homebuyers overall.

Also noteworthy is the finding that the average age of first-time homebuyers purchasing a residential property for investment purposes has declined since 2019, from 41 years to 34 years. “This is in-line with global trends as younger homebuyers prioritise homeownership as a strategic tool for wealth creation and financial security,” elaborates Dyer.

The decision not to increase interest rates further this month, is a great message for the property market, however Dyer envisages that activity in South Africa’s housing market will likely remain subdued until there is a shift to an interest rate cutting cycle.

We anticipate below average demand and modest property price growth in the short-term. Weaker home buying activity will support the investor market as the demand for rental properties increases. Approval rates and the current level of interest rate discounts should hold steady whilst banks continue to compete for good quality home loans amongst a smaller pool of buyers.”