Factors that affect your ability to afford a home

WHEN it comes to investment decisions, there are very few that can have such a large effect on your financial standing and long-term well-being as purchasing a property.

This is according to Adrian Goslett, CEO of RE/MAX of Southern Africa, who notes that for most, buying a property will be the largest financial decision they will ever make.

“Many regard owning a property as a measure of success, with a great deal of the South African population placing more value on homeownership than on other types of investment vehicles,” says Goslett.

“There are several external influences that can impact on the property market and it is important that home buyers are aware of these factors.”

“Awareness of the key factors behind market trends will contribute to knowledgeable property purchasing decisions,” says Goslett

Influences:

The rise and fall of interest rates:

“Very few home buyers are able to purchase a property in cash. In fact, the majority of homeowners will have purchased their property through finance received from a bank or financial institution, which makes them susceptible to fluctuations in the interest rate,” says Goslett.

Regardless of whether a buyer chooses to link their bond to prime or opt for a fixed rate, they are affected in some way by the interest rate.

While the current rate is still relatively low, making property investment far more attractive, an increase of 1% in the prime interest rate will result in a monthly bond repayment increase of R657,76 per million.

Increases in the interest rate generally slow the market and affect buyer’s affordability levels.

Availability of home loan finance:

With recession imminent, the National Credit Act (NCA) was introduced to mitigate the potential expected effects on the country’s economy.

As a result financial institutions tightened their lending criteria, which led to bond approval levels dropping from 80% to below the 50% mark.

The result of this was felt heavily throughout the property market with record low levels of property transactions experienced in 2009.

Much lower numbers of potential buyers were able to meet the strict requirements to access finance that had been imposed.

“Although financial requirements have remained stringent to some degree and emphasis is placed heavily on affordability levels, banks have increased their appetite for risk and subsequently bond approval ratios have increased.

“More and more potential buyers have also started to prepare for homeownership by saving up for deposits and reducing their debt levels,” says Goslett.

Economic outlook:

Economic issues such as the cost of petrol and other resources as well as the employment rate and inflation figures will all have their bearing on the housing market as they place pressure on the population.

“It goes without saying that if the economy is experiencing negative trends, so too will the housing sector.

“An increase in living costs will likely result in fewer consumers being able to show the necessary affordability levels to qualify for home loan finance,” says Goslett.

Rules and regulations:

Much as the introduction of the NCA completely changed the dynamic of the property market and how business within the property sector was conducted, other changes in legislation will also undoubtedly have an impact on the market.

Over the last few years there have been several legislative changes that have impacted on the market such as the Credit Amnesty Bill.

Legislative changes to the real estate agent qualifications also had an impact on the market in that buyers and sellers are now ensured that they are working with a qualified industry professional.

“While these external factors are out of the buyer’s control, they will play a vital role in their purchasing decisions.

“It is important to remember that there are also internal factors that influence buying behaviour such as a buyer’s needs, knowledge of the market and their personal preferences.

“Wherever possible buyers should do their research and be well informed before taking the leap towards becoming a homeowner,” Goslett concludes.