Archive | October 2014

More income, less debt is good news for real estate

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There’s good news for the world real estate market in the latest Global Wealth Report from German insurance group Allianz, which shows that the financial assets of private households in more than 50 countries have grown by almost 10% in the past year – the highest rate of growth since 2003.

What is more, the report says, this means that almost 500m people worldwide have entered the middle income category since 2000 – and are “managing to participate in global prosperity” rather than suffering the deprivations suggested by the latest global growth forecasts released by the World Bank.

And alongside the growth of assets, Allianz notes, there was also a growth  of around at 3,6% in household debt,  including mortgage debt, which shows that more homes are being bought as people’s financial situation improves.

Even more encouraging is the fact that the global debt ratio, that is personal liabilities measured as a percentage of nominal economic output, has fallen a total of 6,4 percentage points since 2009, to a current 65,1%.This means that consumers generally are in a better position to withstand financial shocks such as an increase in interest rates or a sudden fuel price hike – and thus less likely to lose the home they have bought.

But what is the situation in SA? Well, we know that more than 4m people have joined the “middle class” here in the past 20 years, and the latest figures from FNB suggest that the Household Debt-to-Disposable Income Ratio, which has dropped from 83% in 2009 to 73,5% currently, could go below 70% in the foreseeable future.

FNB Household and Property Sector Strategist John Loos explains that the overall rate of credit growth – particularly when it comes to unsecured loans – is slowing and  dropped to 3,64% in August this year, compared to 4,1% in July and a peak of 10,4% in November 2012.

At the same time, the household disposable income growth rate is heading for 7%, which together with lower debt is steadily improving many consumers’ ability to afford a home purchase. This is reflected in the fact that total mortgage loan lending is now growing at 3,46% a year, while other types of lending decline.

This is very encouraging for the local real estate industry, and bodes well for the continued slow recovery of the market, even if there are more interest rate increases next year.

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Make sure you’re financially fit for your first home

First home finances

The decision to buy your first home is exciting and exhilarating, but before you set out to start climbing the property ladder, you need to set a realistic budget so that your dream doesn’t turn into a financial nightmare.

“It’s important to understand that buying your first home is not just about the mortgage,” says Shaun Rademeyer, CEO of BetterBond Home Loans, SA’s leading mortgage origination group. “There are also transaction costs to pay such as transfer duty and bond registration and legal fees, as well as the cost of moving and municipal connection deposits, for example.

“You need to have sufficient cash saved to meet these costs in addition to the amount you have available to put down a deposit, and then when you are working out your new monthly budget, you may need to add the premiums for new life and short-term insurance, for example, or a monthly levy if you are living in a gated complex, and higher utility bills.”

It’s hard for most buyers to work out all these costs, and to avoid nasty surprises, he says, they should consult a reputable mortgage originator before they go househunting. “At BetterBond, for example, we go out of our way to make sure that prospective buyers are not only pre-qualified for a home loan, but fully informed about the whole financial commitment they will be making.

“We especially don’t want first-time buyers to fall in love with homes that they really can’t afford and will become a financial burden to them rather than the source of pleasure and financial security that a home is supposed to be. It is much better to buy a more modest home first time around and avoid the financial stress.”

First-time buyers also need to allow for regular home maintenance and emergencies such as a leaky roof or a burst pipe, Rademeyer says, so their monthly budget should not be so stretched that they are unable to save and build up a “contingency fund”.

“And although it may be unpleasant to contemplate while they are enjoying the prospect of becoming homeowners, first-time buyers also need to think about what would happen if they should suddenly lose their job or become ill.”

Most, he says, would not be able to keep up their mortgage repayments for very long in such circumstances, and that might mean that they and their families would lose their home unless they have income protection insurance. “These days, it is really worth putting this type of safety net in place, as well as credit life insurance that will pay off the home loan if the borrower dies, and enable the family to keep their home.”

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