Are banks 'killing' property market?

Has it ever struck you just how many people are property experts when you mention that you are thinking of buying or selling a property?

Paddy Hartdegen writes a regular column for Property24.com

These well-meaning advisers – with opinions that are certainly influenced more by hearsay than knowledge – will say that now is not the time to be involved in the property sector and, as a rule of thumb, they think they’re right.

People with a little more knowledge, like estate agents, will say it’s an excellent time to buy but, if you want to sell, make sure that you’ve priced your house correctly, particularly if it falls into the upper price brackets.

Do estate agents give you a true value? Never. They give you a ‘gut-instinct’ based value that is determined by what you want and what they think they can get. If the house is slow to move, then the price is too high. It’s a pathetic basis for determining a true value.

Bankers (responsible for lending the money) often won’t say a word – except among friends. And the sad fact of the matter is that bankers are the ones who dictate the state of the property market. If they lend money, sales boom. If they don’t sales dwindle.

In years gone by, when the cyclical swings were not as great as they appear to be today, banks would look for value in a property and would grant a bond based on the value that they attributed to it.

You would expect that pattern to be cast in stone and that, today, if you were to go to four different banks, you would get a very similar valuation from all four of them.

And that’s where you’d be so wrong. Different banks have different criteria and they use different yardsticks to adjudicate value. Ask for a value from a banker and you’ll get four very different ones.

This, naturally enough, makes it incredibly difficult for property owners and for estate agents who, for instance, put in an application for a bond (based on a fair purchase price) to all four of the banks and find that some banks come back and say there is “insufficient value” in the property to the grant the bond amount applied for.

The more expensive the home, the greater variation there is. And much of that valuation process appears to be purely subjective rather than scientific.

Question a bank about the details of why the value is so low and they will come up with all sorts of subjective reasons: “It’s not the right property to be buying in this market” or “The property is over-priced for the area” or “The owners have over-capitalised and want too much money” or the “The asking price is simply too high for the home” or, mostly importantly “We won’t grant a loan of that size against that property”..

Forget the fact that the buyer has a right to decide what amount he or she is prepared to pay for the property in question. Forget the fact that the bank won’t pay a penny of the excessively exorbitant interest rates that are calculated over the next 20 or 25 years. That’s the buyer’s responsibility.

Just remember banks borrow money from the Reserve Bank at 5,5% and charge the money they’ve borrowed at prime of 9% so banks make 3,5% gratis before lending a bean. It’s iniquitous.

If that’s not bad enough then we have the other factor: banks can now stipulate what a house is worth by making a snap, subjective and often unfair value judgment.

I watched one of these valuers at work on the property that I currently rent. He had a measuring tape (on wheels to calculate the perimeter of the house) that he wheeled past the plants (not next to the house) to give him a rough idea of the outer boundary.

Then he walked through the house, taking no more than five minutes to survey the lot. Then he swaggered through to my office demanding that I drop what I’m doing and immediately let him out.

If he was here for five minutes then that was a lot.

I went outside with him and waited next to his run-down white jalopy while he searched for an address in a map book.

After I had spent more time looking at him than he had spent looking at my house, I tapped on his window and said, rather sharply, “Listen, bud, I’m busy so why don’t you leave find directions somewhere else rather than just wasting my time.”

He drove away mumbling – and I didn’t give a fig.

His few minutes here resulted in a decision worth more than a million rand. It’s totally absurd and certainly a deeply unprofessional way to determine the value of a property.

His visit was typical of all those others I have experienced when valuators come to value a house. In the course of my lifetime I have bought and sold more than 20 properties and I have never had a different experience from a bank’s valuation man.

So I was hardly surprised to read the comments from Ronald Ennik, an executive director of Leapfrog Property Group who says that banks are damaging the property market by continuing to value properties “too conservatively”.

He’s quite right. I would take it further than Ennik did: I would say that banks are killing the property market and they seem to be doing so with a smile on their corporate faces and it makes me sick.

Apart from making it really hard to qualify for a bond, the banks are now deciding the value of property and what it’s worth. How unfair is that?

Homebuyers’ dreams are smashed by a cretin who spends less than ten minutes looking at a property. The same cretin who cannot even read directions in a map book.

And the bank he represents accepts his word as gospel – the final say on what a property is worth. It’s bizarre.

Surely there must be a less subjective way of determining property values?

Professional land valuers (like my cousin) will tell you that there is a lot more that goes into compiling an accurate and realistic property value than just wandering around with a tape measure and a pair of reasonable eyes.

And it is these professionals that should be doing the valuations for banks and it is their figures that should be the basis for any bond regardless of which bank it is that’s granting the money.

Property values must surely be based on measurable criteria and not on value judgments. Value judgments are not a valuation, they’re a guess. And I wish that  Standard, Absa, Nedbank and FNB would remember that.

And then stick to lending money based on the risk profile of the individual and not on whether they approve of the purchase he or she is making.

I also wish that Capitec and African Bank (and others) would step into the market and shake it up completely by adopting a more fair and reasonable approach.

Because as things go mortgage-lending banks are just a very motley bunch. 

*Hartdegen writes a regular column for Property24.com. The content of his columns constitutes his personal opinion and doesn’t pretend to be facts or advice. Contact him at via email.

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Well just a comment on your article, a little of the subject but still show on how stupid banks can be when granting a bond. Two houses away in my street, the elderly gentlemen recently died and his house was put onto the market. The house was run down and badly needed repairs, but looking at the property we decided to make an offer of R420K which was accepted. After repairs and restoration the property would be worth at least R800K again. We applied with the banks and got no response back from any one of them. (The applications was done via the estate agent). After about a month, we contacted the estate agent and we were then told we did not get a lone with any of the 4 major banks. This was a little strange to me seeing that I alone on my salary would qualify for at least R2.5Million bond. We left it there but it kept bugging me so I decided to do a little check myself. My partners name at ITC was in the clear, but when I checked my name I found that at TransUnion, one of my accounts which I have closed almost a year ago still had 2 payments outstanding. This was a cell contract which I cancelled after my 2 years contract (Virgin mobile) but what I failed to realize is that  the account is paid at the start of the month, for the month, and that I also cancelled the debit order to early. The long and short of it was that I owed Virgin Mobile 2 months payments, totalling R240. i.e. 2 payments of R120! And this showed as not being paid for more than 150 days on TransUnion. If you check on the other accounts which I pay every month; about 15 of them; they are always on time, and not a single red figure appears on TransUnion for any of the other accounts except the cell contract. So, the 4 major banks decided that I can not borrow R420K from them, seeing that I own a cell phone company R240. This just shows me that there is no logic when you actually apply for a home loan. Everything is fed into a computer and if the computer picks anything “strange” up, it just declines the home loan. The house was only recently been sold after standing empty for about 6 month, but even I cleared my name at Virgin Mobile and TransUnion, I decided not to stick my head again into the property market.- Chris

Whilst I agree with much of Paddy’s sentiment regarding the role that the lending institutions are playing in the state of the property market, his article begs a few questions that need answering:
If banks are earning 3.5% on mortgage loans (R2,917pm capitalised for 20 yrs on a R1 million loan!), why aren’t they throwing money at buyers? Perhaps it is because of the consequences of “reckless lending” as provided for in the National Credit Act. Perhaps it is because the South African property market is still overheated price-wise due to the 2004/05 price bubble and sellers’ reluctance to moderate what are still unrealistically high expectations. Perhaps it is simply because the financial institutions are being cautious with their available resources and don’t wish to extend their mortgage debt book due to the inherent risks in an economic down cycle. Who knows what their true motivation is?
Paddy contends that the true value of a property is what a willing buyer is prepared to pay for it (the same contention of the majority of estate agents), but the residential property economy is more complex than that. Emotion drives purchase decisions (and thus what a buyer is willing to offer) to a greater degree in this market than in, for example, the commercial and industrial sector. This results in a situation where an investor buying to rent may offer R1,200,000 for a property based on potential yield (ROI), but a family wanting to buy the property because of its proximity to a desired school would perhaps offer R1,500,000, based on the respective utility of the property to each of them. Which figure represents the true value?
Banks don’t “approve of the purchase [the buyer] is making” as contended by Paddy. They don’t give a hoot, as long as they make money and, more importantly, their investment is secure. What they do care about is their extensive “properties in possession” (PIP) portfolio and the difficulty in liquidating mortgage debt on these properties where loans granted on the back of the 2004/05 price bubble exceed current value (even when calculated on the basis of what a willing buyer is prepared to pay!). Is their reluctance to approve high LTV applications not simply a matter of “once bitten, twice shy”.
It is without doubt true that the residential property market needs a shot in the arm and the banks can play a significant role in providing this by easing up on lending criteria. The entire industry (ourselves included) have been advocating this. However, it must be borne in mind that the state of the economy is the single most important determinant of the fortunes of the property sector. Recent moves by some banks to reinstitute 100% home loans in the sub-R2 million bracket are encouraging. These moves need to be supported and, with growing confidence and increased risk appetite on the part of the banks, we should see a return to some measure of normality in the third and fourth quarters of this year. - Kevin

I do think estate agents are under obligation to perform a true valuation which should be based on property stats i.e win deeds (properties sold in the same road over the last yea per Squire M.) and then assessment of improvements on the properties taken into account. Having said that there are still agents that will do anything for a quick sale and get sole mandate on a property to secure the sale. The banks have been in this rut for years now; and it is shocking that they don’t use qualified staff to assess valuations; One of my clients requested a valuation which he had to pay for and the same thing the man barely walked through the house and came up with a reticulations valuation almost half of what he paid for the house some years back, this obviously infuriated my client. He never even asked what the SQM of the house was. I have said for years our 4 banks need competition to the point that I have even sent mail to banks in other countries suggesting the enter the SA market. For example a small island like Mauritius has 19 banks compared to SA”s 4. In addition our banks all of them meet on a 6 or 8 weekly bases to decide they way forward what sector of high risk clients to avoid, margin on deals and so forth.  As far as im concerned this is cartelling and if companies like Premier can be fined for cartelling then so should the banks.The banks have killed the SA market by once offering 110%+ bonds to clients – they coursed the debt problem. Anyone could get a bond once upon a time. The motor industry too was affected by this – just look at how many car dealers have closed down. There staff are totally incompetent from the business development manager right up to the top high flying directors haven’t a clue, my guess is some of these guys don’t even know how to use a financial calculator. Once had a deal declined for a section 21 company for a measly R100k for the oldest children’s home in Johannesburg, financials strong affordability good. Because one of the appointed directors on the board had missed a payment on his car with Standard bank.  I can go on…Bank margins are endless with all the add on’s its not just margin on rate its documentation fees, other hidden cost credit life, and and and it goes on. Estate Agents  and home owners are the most affected. New laws  (credit agreement act new consumer act) are just making it increasingly more difficult to sustain an income as an agent. As far as the little gray men in their clapped out cars that cant even write valuing a property well they should simply be eliminated. I would certainly welcome more banks!!!! But nothing will change they are the mafia in a world of their own.- Paula