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Factors impacting the property market

09 Jan 2014

There are very few, if any investment decisions that can have such a massive impact on a person’s financial well-being as buying property.

The banks’ appetite for risk and their willingness to grant loans will impact the property market and the number of transactions.

For the large majority of the population who are able to purchase property, it is likely to be the largest single financial investment they ever make in their lifetime, says Adrian Goslett, chief executive officer of RE/MAX of Southern Africa.

“The fact that property is often a consumer’s largest asset that accounts for possibly the biggest portion of their personal wealth is true for both those who live in South Africa as well as those abroad.”

Owning a property is seen by many around the world as a measure of success and achievement.

In fact, a large portion of the South African population value property ownership over nearly every other kind of investment available to them.

Bearing this in mind, it is important to understand the various factors that could influence the property market and possibly impact on consumers realising their dreams of becoming property owners, says Goslett.

He notes that there are a number of external factors that affect the property market and change the dynamics that aspiring homeowners find themselves in.

Knowing what to look for and how these factors relate to the property market could assist consumers to adapt and make the necessary changes in order to turn their property ownership dream into a reality.

While a portion of factors that impact the market and buying behaviour stem from internal influences such as a buyer’s needs, knowledge of the market and their personal preferences, other external factors that are beyond the consumer’s control will play a role.

Goslett explores some of the external factors that will have an influence on the property market:

Legislation

Just as the introduction of the Consumer Protection Act (CPA) proved government legislation can have a remarkable influence on the property market, other laws that have had an impact have been the changes to the Capital Gains Tax levels and the drop in transfer duties.

The more recent introduction of the Credit Amnesty Bill could also play a part in changing the property market dynamics as we know them.

With the removal of negative credit information from credit bureau databases, more buyers may be eligible to enter property market, however, this could also mean that credit will be offered at a higher cost in order for banks to be able to absorb the higher risk.

With the removal of negative credit information from credit bureau databases, more buyers may be eligible to enter property market, however, this could also mean that credit will be offered at a higher cost in order for banks to be able to absorb the higher risk.

Interest rate

Most home buyers will require finance from a bank to purchase their property.

What this means is that these buyers will be affected by any fluctuations in the prime lending rate. 

Even if homeowners choose a fixed interest rate for their bond, the rate given by the financial institution will be based on the current prime interest rate.

The current interest rate of 8.5 percent has made property investment a far more attractive option for buyers who have the means to obtain finance.

An increase in the rate, which is expected to happen sometime during this year, could negatively impact the property market as many consumers are already dealing with high levels of debt and the rising cost of living expenses.

Banks’ appetite for risk

With the introduction of the CPA and the strict lending practices adhered to by financial institutions, bond approvals dropped from around 80 percent to well below the 50 percent mark.

As banks have relaxed their approval criteria to some degree, the rate of bond approvals has improved, but this is still not at levels seen during the boom.

The banks’ appetite for risk and their willingness to grant loans will impact the property market and the number of transactions.

Currently South African credit legislation dictates that a bond applicant’s monthly bond repayment cannot be more than a third of their net income.

Although not guaranteed, most applicants will also require some form of deposit for approval. Generally the deposit requirements range from 10 to around 30 percent depending on mitigating circumstances.

Economy

Economic factors such as the employment rate and inflation figures will have their impact on the housing market as they place pressure on the consumer.

Generally speaking, if the economy is suffering and experiencing negative trends, so will the housing sector as less consumers will be able to show the necessary affordability levels.

Proof of this was seen in 2008, when the global economic crisis hit and the property market experienced a sharp decline.

The current economic environment continues to see improvement and this has filtered through to the property sector, with progressively higher sales volumes seen on a yearly basis since the end of the recession.

“Understanding how each of these external factors impact on the property market on both a global and local level, will empower property buyers with the knowledge to evaluate the changes they need to make to reach their home ownership goals.”

Insight into the key factors behind the market will assist potential homeowners make informed property purchase decisions, adds Goslett.

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