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South Africans were not the hardest hit during the global economic recession, but compared with its UK and US counterparts, local banks did not have the advantage of lower interest rates to facilitate over-indebted customers. But the continued cautionary lending approach of banks as seen during the past three years, combined with reduced interest rates, may well contribute to the recovery of the property industry. Some of the biggest industry lessons learnt during this period are that SA’s relatively high interest rates, coupled with massive job losses have made the property market recovery more difficult. Jan Kleynhans, Head of Home Loans at First National Bank says: “The one lesson is that we should have reduced interest rates a lot faster in 2008 and 2009. We are now seeing the impact of this as the smaller estate agencies and builders have gone out of business on the one hand, and the demand for property by consumers is largely absent, as in the US and UK.” It is necessary to see the industry move forward in a sustainable manner, and although the property industry has responded very well under very difficult conditions, essential to the recovery of the property market will be the financial health of consumers - reduced consumer debt, stabilization of job losses and an increase in employment opportunities. “We are unlikely to see much growth until consumers have shed debt and the economy is creating jobs on a meaningful scale again.” It is doubtful then, that high consumer demand for property as an investment class - such as the buy-to-let demand that created massive over-supply - will be seen for many years. Partial movement in the market will result from property owners likely to upgrade existing properties, and delaying or avoiding the high costs of selling and buying. First National Bank sees the positive results produced by the National Credit Act as sustainable in the long term. Kleynhans says the NCA has brought the right discipline to the industry that includes a careful review of consumers’ ability and prospects of servicing debt in the future. It is only when consumers fully understand the link between borrowing money and future cash flow that they can manage to balance their debt obligations with their lifestyle aspirations. He says the challenge that lies with the NCA is the debt counselling process, currently undergoing tough challenges and possibly a further success to the NCA in future. But exercising extreme caution in following every lending rule to avoid legal foreclosure on defaulting borrowers does not necessarily mean traumatic repossessions of family homes are avoidable. Kleynhans says FNB took the initiative of introducing Quick Sell as an alternative process where properties owned by severely over-indebted consumers are sold through estate agents, which result in far higher sales proceeds. He says: “Unfortunately, the bank is at the early stages of having to sell off distressed properties, so the worst is still to come in terms of these impacting on the property market.”But Kleynhans expresses concern about the low prices fetched for re-possessed properties sold by the Sheriff’s Office. FNB, together with other banks, lawyers, estate agents, academics, law societies, government attorneys and auctioneers, would like to see the rules of the Sheriff’s Office changed to enable both creditors and debtors to collect greater earnings on distressed properties. Over-indebted defaulting bank clients are starting to bypass the Sheriff’s Office and are using private auctioneers to dispose of their properties voluntarily so as to avoid court orders. Distressed sellers take this action in the hope of fetching higher sale values, despite higher commissions payable compared with the Sheriff’s Office’s maximum legal fee of R8,000 earned for a sale as low as R240,000. Commenting on the growing affordable housing segment of the market, Marius Marais of FNB Affordable Housing says with some estimated 600,000 units required in the affordable housing market, units priced below R300,000 attract particular attention, making it a potential growth area. Consumers in this sector are protected from fluctuating interest rates and, similarly to other major banks, enjoy the security offered by fixed interest rates. FNB has served the GAP market by providing 100% bonds throughout the recent property cycle. Consistency, such as fixed interest rates are very important in this segment, in particular to developers who, through financing large projects, are vulnerable without the certainty required for committing to long-term projects. Surprising to some are the low levels of defaults experienced in the affordable housing segment of the market compared with that at the higher end of the market. Marais ascribes this phenomenon to families only owning one home to live in that is not an investment property, as well as to monthly repayments being payroll deducted.FNB welcomes more affordable housing investment funds onto the market to complement existing funds, some of which focus on the much-needed development finance part of the value chain.Article courtesy of