Research Residential

New home loan lending volumes remain muted but approval rates are strong

Lenders continue to ease access to home finance in an effort to further aid homebuyers in a more challenging property market, according to statistics for Q3 2023 released by ooba Home Loans.

The key market indicators illustrate ongoing subdued property price growth providing affordable opportunities for homebuyers to acquire property and the continued upward trend in deposits.

Despite the decision by the Reserve Bank to leave interest rates unchanged at the past two MPC meetings, an increase in the average deposit value signals that homebuyers have adopted a cautious approach when taking up elevated levels of debt,” comments Rhys Dyer, CEO of ooba Home Loans.

The banks’ willingness to continue to offer competitive rates, with an average rate below prime, paints a positive outlook for the property sector at the peak of the interest rate cycle,” he adds.  

Good news for buyers is that the average interest rate awarded to ooba customers in Q3 2023 was recorded at 14 basis points cheaper than Q3 2022 – now at -0.44% below prime. “This should assist buying activity in the market – particularly among homebuyers with a good credit score and a deposit-backed application,” he adds.  

In addition, the average bank approval rate for ooba Home Loan applicants continues to hold steady at 82.9% for Q3 2023 – marginally lower than the 83,6% recorded in Q3 2022.

The average approved bond size for Q3 2023 remains relatively static, coming in at R1,285,772 (up by 0.9% from Q3 2022) and R1,002,349 for first-time homebuyers (up by 0.3% from Q3 2022). “This slowing growth is attributed to slowing property price growth, to particularly first-time homebuyers choosing to put down higher deposits and to customers choosing properties that they can afford in a higher interest rate and loan repayment market.”

Whilst approval rates and interest rate concessions remain resilient, there is a significant reduction in home loan applications year-on-year. This is largely attributed to lower demand for property due to weakening economic conditions, higher costs of living and increased interest rates. The volume of home loan applications recorded in Q3 2023 has declined by 25% year-on-year, and down by 28% from Q3 2021, before the start of the rates hiking cycle.

The average purchase price paid by homebuyers is beginning to show nominal year on year growth – up by 1.5%, now at an average of R1,423,663, compared with R1,402,408 in Q3 2022. Growth in the average purchase price paid by first-time homebuyers is up 2.7% year-on-year, now at R1,116,672.

While subdued house price inflation is a symptom of the contraction of the property market, it does provide more affordable opportunities for homebuyers to acquire property,” says Dyer.

The effects of a high interest rate environment are clearly depicted in the increase in instalments as a percentage of gross income – up from 18.4% at the start of 2021 to 20.7% in Q3 2023.  For joint homebuyers, proposed instalments have risen from 16.4% of gross income to 18.0%. “This represents an increase of 230 basis points for individuals and 160 basis points for joint homebuyers,” says Dyer. 

He does however note that the silver lining here is that instalment payments remain comfortably below the industry benchmark of 30%, suggesting that homebuyers applying for a mortgage are not as financially stretched as some would anticipate.

Homebuyers understand that in a high interest rate environment, bigger deposits help to reduce your monthly repayment and secure a better interest rate on your home loan.”

Dyer notes that this is evident in the continued growth of deposits among both first-time and second-time homebuyers. “The average deposit for Q3 2023 was recorded at 9.7% of the purchase price (R137,891) – up by 6.6% year-on-year from Q3 2022 to Q3 2023. The first-time homebuyers’ segment also recorded a major increase in deposits – up a staggering 25.9% year-on-year from Q3 2022 to Q3 2023, now at R114,323 – 10.2% of the average purchase price.”

Dyer notes that applications for zero deposit bonds continue to decline, now accounting for 53.7% of ooba Home Loan’s total application intake – a drop of just over 10% from Q3 2022. “However, approval rates for these applications remain strong.”

Applications from the more interest-rate sensitive first-time homebuyer has reduced from 54% of total applications in Q3 2020 – now accounting for 48% of all applications processed by ooba during Q3 2023.  This indicates that at present, first time homebuyers in this market segment who are challenged with affordability constraints are placing their homebuying plans on hold.

First-time homebuyers do still make up over half of the applications received in the Free State, KwaZulu Natal, Mpumalanga and Gauteng South and East Rand – a clear sign that they’re still keen to get a foot on the property ladder.”

Interestingly, the first-time homebuyers who are buying, are in fact spending more. “The average purchase price has increased year-on-year – up from R1,087,089 in Q3 2022 to R1,116,672 in Q3 2023.”

ooba Home Loan’s data also shows that first-time homebuyers are getting older – now at 36, up from 35 in Q3 2022. “This figure comes as no surprise,” comments Dyer. “Homebuyers who continue to prioritise their financial wellbeing may take longer to enter the property market as they continue saving to build up a healthy deposit.”

More than just a buzzword, generational wealth provides long-term financial security through the purchase of assets such as real estate, investments and businesses. Today, many South Africans are investing in property as a means of creating generational wealth, and a clear indicator of this is the continued growth in home loan applications for investment properties. “This segment continues to yield robust demand – up by 34% from Q2 2023 – and largely driven by the demand for properties in the Western Cape.”

Looking ahead, Dyer comments that while levels of demand have reduced significantly we believe we are almost ‘out of the woods’, with home loan demand expecting to increase in the new year as we see some softening of interest rates. “However, homebuyers should continue to shop around for the best deals on their home loans as well as saving for deposits to curb the effects of interest rate fluctuations,” he concludes.