Tough Economic Conditions Eased Through Home Loan Lending Competition

With interest rate hikes expected to plateau and an expectation of low nominal property price growth for 2023, the property market is set to continue to offer opportunities for new buyers, with homebuyers prioritising smart budgeting - deposits and more affordable properties, according to Rhys Dyer, CEO of ooba Home Loans.

"In the current tougher economic climate, housing affordability is going to be the greatest challenge for the residential property market in 2023.  However, we envisage that banks will continue to compete for new home loan business and offer favourable home loan finance terms, similar to levels experienced in 2022," says Dyer.

There is still a lot of value in shopping around for a home loan using a home loan comparison service. "Time and time again, our data shows that we can help homebuyers secure the best possible interest rates on their home loans. In tough times, these savings can equate to tens of thousands of rands."

Dyer concludes: "We anticipate that several key trends will lead the way this year, namely shifts in the first-time homebuyer's profile; fewer 100% home loans due to long-term affordability; buyers focussing their purchase decisions on areas where they can get more value for their money;  increasing popularity of energy efficient homes, and the ongoing buy-to-let investments."

The latest statistics for the last quarter of 2022 for the fourth quarter released by ooba Home Loans, South Africa's leading home loan comparison service, reveal that the country's banks continue to offer consumers good home loan opportunities.

Home loan approval rates are holding steady despite the upward trend in the prime lending rate. "The banks are still competing strongly for home loan business and are improving barriers to entry by offering some of the lowest rate levels seen in the last decade and keeping approval rates robust."

Increases in the prime lending rate have impacted home loan demand

The quick succession of rate hikes experienced since November 2021 has had a dampening effect on the homebuying market. "The prime lending rate increased by 350 basis points to it's current rate of 10.5% at the end of Q4 '22," says Dyer. "ooba's Q4 '22 home loan application volumes are down by 17% from Q4 '21 and have returned to volumes similar to those recorded in pre-pandemic Q4 '19, when the prime lending rate was at 10%," explains Dyer.

Approvals remain strong due to bank competitiveness

ooba achieved an approval rate of 84.1% for its homebuyers in Q4'22, similar to the approval rate of 83.7% in Q4'21.  "Banks' confidence in the South African residential property market is evident in their willingness to grant home loan finance at these levels, despite subdued economic growth", notes Dyer.
At current levels, the average rate below prime (-0.68% in Q4 '22) is significantly lower than the levels reached during the early stages of the pandemic, matching the rate concessions last seen more than a decade ago.  This cheaper cost of borrowing at lower interest rates improves affordability for home loan finance.

"Rates offered below prime have improved sharply across all regions, with the Western Cape in particular offering a rate of prime -0.88% in Q4 '22. This is significantly lower than the rate offered during the height of the COVID-19 buying boom when it reached a low of prime -0.71% in May '20," says Dyer. "Gauteng North & West Rand follow closely at prime -0.76% in Q4 '22, following a low of prime -0.86% in Apr '20."

Slowing property prices will be good news for new home buyers

In response to the effects of the prime lending rate, property price growth has slowed and is now showing meagre nominal growth. The average purchase price in Q4 '22 is recorded at R1 422 992; this is only a 1.5% increase on the Q3 '22 figure of R1 402 408, and a 2.4% year-on-year increase from the average purchase price of R1 389 715 in Q4 '21.

Notably, property prices of first-time homebuyers are recording negative real growth. In Q4 '22, the average purchase price of the first-time buyer dipped to R1 113 157 - showing a year-on-year decline of 2.4% for this segment.

This is driven by a combination of slower growth in property prices as well as first time homebuyers choosing to buy on average smaller properties that meet their monthly repayment capabilities.

Trends in Purchase Price Segments

Properties in the price segment above R1.5 million make up 59% of finally granted bonds in Q4'22 - unchanged from Q4 '21, while properties in the price range above R750 000 to R1.5 million account for 30%, marginally down on the 31%  recorded in Q4'21.  11% of finally granted bonds in Q4'22 fell into the price category of below  R750,000, up 1% on Q4'21. "Rising interest rates have therefore only seen a slight shift of more homebuyers into this more affordable property price segment.  With homebuyers set to face affordability hurdles in 2023,  we expect to see a more significant shift towards the middle to lower purchase price segments" notes Dyer.