ABSA speaks about buying property in the current economic cycle

Opportunities for investors if you are patient in terms of your expected capital returns

“Consumers need to be prudent when buying residential property in the current economic cycle,“ says Gavin Opperman, Group Executive: Secured Lending, Absa Retail Bank.

As affordability remains under pressure due to factors such as rising interest rates, consumers may need to consider buying smaller, less expensive homes to ensure their affordability in the medium to long term.

Nominal property price growth is expected to slow down further to between 5% and 6% this year and just below 4% in 2009.

Additionally, interest rates are expected to increase by another 50 bps in June with a risk of further hikes in the short term.

With this in mind, consumers will be wise to carefully assess their disposable income and make prudent decisions when selecting which properties they buy in this current cycle.

Opperman explains: “Residential property should always be seen as a medium to long term investment, especially in the current cycle, and therefore, consumers need to be aware that real returns will only be realised in time.

"Also, when accessing affordability, rather buy for less and put down a deposit to mitigate the risks of the current cycle.”

In response to current market conditions, Absa Home Loans has adjusted its credit lending policy, requiring customers to pay a deposit when purchasing a new home.

Opperman explains the motivation behind this decision: ”When looking at the picture holistically, we need to encourage South Africans to avoid the risk of being over-indebted.

"Working towards saving a deposit for a home instils a good discipline and fosters a savings culture. Chances are also that consumers will buy a home closer to what they can realistically afford when planning their purchase including a deposit.”

Opperman continues: “The lending landscape has changed with the implementation of the National Credit Act in 2007 being a significant driver in managing banks and consumers lending and borrowing behaviour.

"While this had a positive impact on all concerned, one simply must factor in the down cycle when making responsible lending decisions and motivating consumers to make wise financial choices.

"By including a deposit requirement, we ensure our customers take a very close look at what they can realistically afford.”

In spite of the current conditions, there are various options available to consumers. For first home owners, buying down as a way to get started is advised.

Alternatively, rent initially until such time that you are sure you can afford a home. For those already in the market but needing a bigger home, we recommend rather doing alterations to your existing home than selling to buy bigger. Opperman says:” The current cycle brings with it some opportunities for investors if you are patient in terms of your expected capital returns. Rental yields are to pick up further from current levels which may further boost your income.

And for those consumers feeling the pinch, contact your bank to make suitable arrangements.

Those arrangements may include considering a fixed interest rate as a way of managing your cash flow and mitigating the risk of further interest rate increases or extending the loan term from 20 to 30 years.

From www.itinews.co.za Editor Andree Laubscher