While current conditions are prime for purchasing property, many of today’s would-be homeowners – especially the younger generation – are struggling to take advantage of the opportunities in the current property market, says Adrian Goslett, CEO of RE/MAX of Southern Africa.
He notes that although favourable interest rates have been prevalent in the market for the past few years, high debt-to-income ratios have held many potential homebuyers back from realising their goal of owning a property. “Affordability is a key factor when it comes to obtaining the necessary finance for purchasing a property, and the fact is that many consumers in today’s market simply don’t have the affordability ratios required by the banks. This is largely due to the continually increasing cost of living and the exceptionally high levels of debt that South African consumers have. According to the South African Reserve Bank’s quarterly bulletin, the amount of debt owed by consumers as part of their income was 75.6%. What this translates to is that for every R1000 consumers earn, around R750 is going towards paying back debt,” says Goslett.
“In order for consumers to invest in the property market, they will need to focus on paying down debt to improve their affordability levels – a challenging task with the cost of food and fuel continually rising.” He adds that while the prime interest rate is currently at 8.5%, it is predicted that it will likely start to increase from early in 2014. This will put further pressure on consumers who are already struggling to service their current outstanding loans.
Aside from high levels of debt, another factor that is affecting more homebuyers entering the market is the highly competitive job market. “While a large number of younger generation consumers have studied, they now face the daunting task of finding employment in a job market where one in every four South Africans is unemployed. According to economists, it is predicted that the economy will need to experience an annual growth of around 7% in order to accommodate the number of students that are currently entering the job market each year. However, the annual growth is currently around 5%, which falls short of the country’s required level,” says Goslett.
Due to the fact that economic growth has seen a tapering since 2010, employment growth has also slowed down, which will continue to affect the number of first-time homebuyers entering the market. According to John Loos, FNB Household and Property Sector Strategist, many younger consumers are delaying their departure from their parents’ home and are holding out for more favourable economic times. He notes access to affordable credit is crucial for many credit-dependent young home buyers who have yet to accumulate savings. However, affordability of credit is partly determined by income, thus implying that employment creation is very important in driving this access to credit.
“Until employment levels increase, it will be the consumers over the age of 30 years old who are more established in their careers who will continue to be the driving force behind the property market,” says Goslett. “This demographic generally has the necessary financial stability and means to save the deposit amounts required by banks, to take advantage of the current market conditions,” he says.
Goslett concludes by saying that persistent younger consumers who are able to overcome the challenges they face and gain momentum in their careers should avoid the debt trap and save wherever possible to ensure that their dream of homeownership becomes a reality.
* This report was prepared by RE/MAX