Analysis of latest property buyer experiences with banks, what South African Reserve bank really thinks of nation’s bank executives.
This article, first published in Pam Golding Properties’ Intellectual Property magazine under the headline “Interest rates and mortgages”, sums up the South African credit situation for property investors.
Bashing the banks is a popular pastime almost everywhere. Here in South Africa, however, the clamour is growing and the High Street bankers are taking stick for making too much money, not lending enough money – and being in cahoots, to the detriment of their customers, particularly the man in the street.
Even the arch-conservative Reserve Bank Governor, Tito Mboweni, has taken the banks to task, asking why their margin between the repo rate (the rate the commercial banks pay to borrow from the RB) and the prime rate (the base rate at which they lend) is so high – and why they all charge the same rate. Currently, the repo rate is 8,5% and the prime rate is 12%.
Mboweni, speaking at the RB’s quarterly Monetary Policy Review, stated that for 10 years he has been trying to persuade the banks to compete with each other, giving consumers the opportunity of competitive borrowing rates.
They do compete when it comes to various forms of deposits such as savings and long and medium term fixed deposits. And they have (mainly in the past) offered varying rates above and below prime on secured credit products such as mortgages and motor finance.
But they stubbornly stick together when it comes to the prime rate; the RB cuts the repo rate by 100 points – the banks cut prime by 100 points, all singing from the same song sheet. Mboweni said: “The spread is something we need to look at very carefully. There is nothing that says the spread must automatically be 3,5%. I have tried moral
suasion. It hasn’t worked. I appeal to the banks to look at the spread. We need a bit of competition.”
Unfortunately, the commercial banks have more on their plates at present. The recession has bitten deeply into their profit margins and the big four, Absa, Standard, FirstRand and Nedbank, are, according to analysts, taking a beating, particularly due to bad debts and the economic slowdown.
Standard chief executive Jacko Maree says the bank expects extremely difficult operating conditions to continue this year. Absa’s Maria Ramos says the bank has been adversely affected by distressed consumers. They have all tightened their lending criteria – beyond the strictures of the National Credit Act which first began
putting the brakes on South Africa’s consumer spending spree. Mortgage approvals have been particularly squeezed. Data released by the Reserve Bank shows that March returned the lowest mortgage advances growth rate in six years.
There are mixed tales slipping through as to the level of mortgage applications being turned down by the banks, but it is generally agreed that the days of 100% bonds are over. A reasonably large deposit (30% and more) is now the only route for borrowers, and cash is king once again. In fact, Pam Golding
Properties Western Cape region reports cash buyers making up almost 50% of sales, and mainly at the very top end of the residential market. In April, house price growth dropped to
its lowest level since November 1986, according to Absa. In spite of the 3,5 percentage points (as at May 15) worth of interest rate cuts since December last, households remain under
pressure. The economy is in recession and 2009 GDP growth is expected to be a negative
half percent. The housing market is forecast to continue experiencing low levels of activity until later in the year. Absa projects that house prices will fall by 3%-4% in nominal terms and 8,5%-9,5% in real terms .
Is there any light at the end of the credit tunnel? Will the tight liquidity situation ease? Well, WesBank has announced it has started relaxing its credit criteria and has increased its final approval rate to around 52%, which is good news for the hard-pressed motor industry.
To do so, it has restructured finance deals and now requires bigger deposits, shorter repayment terms, lower balloon payments – and has even introduced retrenchment cover which, says sales and marketing head Chris de Kock, is providing the bank’s credit committee with some comfort.
However, long-term mortgage bonds are a different kettle of fish. But where there’s
a will there’s a way!