Can you pay your bond?

[Pixual]

I just read this article on iAfrica and felt a sense of déja vu.

In the 1990's I was the Mortgage Loans Analyst for NBS and went on to become the Market Development Manager for Home Loans before my final job at the bank: selling off all those repossessed properties.

As I recall things in 1998, a few years after lending quotas were abolished, the banks went crazy trying to finance as much as they could. There were huge incentives offered to Loans Consultants to bring in as much business as possible.

At the coalface these loan applications were vaguely perused by credit managers who were more interested in winning a seat on the annual overseas convention for sales performance than they were in whether the applicants could actually afford the loan.

When the interest rates spiked at 24% in 1998 from docile levels of around 16%, the sh*t hit the fan. And it stank to high heaven. How could people who were already stretched on affordability at 16% suddenly come up with an additional 8% on their bonds (which translated into substantial increases in monthly instalments). They couldn't and the credit controllers swept into full force, foreclosing on loans across the board.

There was one instance in Durban North where a mansion that we had loaned R2 million against went back on sale as a Property In Possession (PIP) for around R800,000. It didn't sell. I think it eventually went for about R500,000. So where does the deficit of R1,5 million come from? It comes off your bottom line. Loss.

Investors don't like to see those loss brackets on the income statement, so they cut the losses and pull whatever they can out of the company before they lose it all. The result is predictable. Stronger companies swoop in and pick up the pieces. NBS goes to BoE, which goes to Nedcor. People lose their jobs. And their houses.

What I have observed happening in the property market in the past 5 years sends shivers down my spine. Tito Mboweni brought interest rates down from levels of about 17% in 2002 to less than 10% in a space of 36 months (somebody buy that man a pair of chaps and spurs and give him a lasso!). As a result of money becoming cheaper the housing prices shot through the roof to ridiculous levels. Estate Agents (self proclaimed experts in the property market) started buying X5's with all the commission they were making and bond brokerages popped up all over the place. Buy! Buy! Buy! This is not a bubble! We've been in property for 30 years, We know what we're talking about! That duplex that was worth R250,000 last year is now worth R500,000! Buy! Buy! Buy!

Houses got sold faster than popcorn at the movies and behind it all the banks were quite happy to finance these assets at ridiculous new "values", in the process creating massive amounts of equity. This new found equity saw home owners taking overseas holidays, buying new cars, putting in new driveway paving, kitchens, jacuzzis, you name it. All on the bond.

So now the economy is booming! Everyone is happy spending all this equity, but is there any real economic growth taking place amidst the spendthriftery? Is our economy creating new jobs? New factories? New exports? No, not really. The only thing being exported is our money in the race to buy faster cars than your neighbour, bigger boats and in some cases bigger boobs.

Suddenly the cowboy at the reserve bank has a fire lit under his ass and can't figure out why inflation is still so high despite the "booming" economy. The economists explain what is happening. Oops. We better put up the interest rates, stop people from spending all this equity.

And then its 1998 all over again. The bubble bursts. That house you just bonded for R1,5 million suddenly costs you an extra grand a month every time the interest rate goes up a percentage point. Where do you get it from? You can't suddenly ask your boss for another increase to pay your bond. So you sell your house. So does your neighbour, and the guy across the road. The estate agents start rubbing their hands, but it seems they have run out of moisturising lotion and can't slide up poles anymore. The houses aren't selling as fast as popcorn today and suddenly there are so many houses on the market that buyers are spoiled for choice. Prices go down.

Reality check! Your house is not really worth 350% more than it was in 2002. How many people can afford to pay R19,000 a month for a house that sells for R1.5 million (14.5% bond rate)? And if the rate goes up to 18% you'll be paying over R23,000 a month.

Can you afford it? What's your house really worth?

 

[Piepalook]

I just read this article on iAfrica and felt a sense of déja vu.

In the 1990's I was the Mortgage Loans Analyst for NBS and went on to become the Market Development Manager for Home Loans before my final job at the bank: selling off all those repossessed properties.

As I recall things in 1998, a few years after lending quotas were abolished, the banks went crazy trying to finance as much as they could. There were huge incentives offered to Loans Consultants to bring in as much business as possible.

At the coalface these loan applications were vaguely perused by credit managers who were more interested in winning a seat on the annual overseas convention for sales performance than they were in whether the applicants could actually afford the loan.

When the interest rates spiked at 24% in 1998 from docile levels of around 16%, the sh*t hit the fan. And it stank to high heaven. How could people who were already stretched on affordability at 16% suddenly come up with an additional 8% on their bonds (which translated into substantial increases in monthly instalments). They couldn't and the credit controllers swept into full force, foreclosing on loans across the board.

There was one instance in Durban North where a mansion that we had loaned R2 million against went back on sale as a Property In Possession (PIP) for around R800,000. It didn't sell. I think it eventually went for about R500,000. So where does the deficit of R1,5 million come from? It comes off your bottom line. Loss.

Investors don't like to see those loss brackets on the income statement, so they cut the losses and pull whatever they can out of the company before they lose it all. The result is predictable. Stronger companies swoop in and pick up the pieces. NBS goes to BoE, which goes to Nedcor. People lose their jobs. And their houses.

What I have observed happening in the property market in the past 5 years sends shivers down my spine. Tito Mboweni brought interest rates down from levels of about 17% in 2002 to less than 10% in a space of 36 months (somebody buy that man a pair of chaps and spurs and give him a lasso!). As a result of money becoming cheaper the housing prices shot through the roof to ridiculous levels. Estate Agents (self proclaimed experts in the property market) started buying X5's with all the commission they were making and bond brokerages popped up all over the place. Buy! Buy! Buy! This is not a bubble! We've been in property for 30 years, We know what we're talking about! That duplex that was worth R250,000 last year is now worth R500,000! Buy! Buy! Buy!

Houses got sold faster than popcorn at the movies and behind it all the banks were quite happy to finance these assets at ridiculous new "values", in the process creating massive amounts of equity. This new found equity saw home owners taking overseas holidays, buying new cars, putting in new driveway paving, kitchens, jacuzzis, you name it. All on the bond.

So now the economy is booming! Everyone is happy spending all this equity, but is there any real economic growth taking place amidst the spendthriftery? Is our economy creating new jobs? New factories? New exports? No, not really. The only thing being exported is our money in the race to buy faster cars than your neighbour, bigger boats and in some cases bigger boobs.

Suddenly the cowboy at the reserve bank has a fire lit under his ass and can't figure out why inflation is still so high despite the "booming" economy. The economists explain what is happening. Oops. We better put up the interest rates, stop people from spending all this equity.

And then its 1998 all over again. The bubble bursts. That house you just bonded for R1,5 million suddenly costs you an extra grand a month every time the interest rate goes up a percentage point. Where do you get it from? You can't suddenly ask your boss for another increase to pay your bond. So you sell your house. So does your neighbour, and the guy across the road. The estate agents start rubbing their hands, but it seems they have run out of moisturising lotion and can't slide up poles anymore. The houses aren't selling as fast as popcorn today and suddenly there are so many houses on the market that buyers are spoiled for choice. Prices go down.

Reality check! Your house is not really worth 350% more than it was in 2002. How many people can afford to pay R19,000 a month for a house that sells for R1.5 million (14.5% bond rate)? And if the rate goes up to 18% you'll be paying over R23,000 a month.

Can you afford it? What's your house really worth?

Nicely put!
I bought 19 properties in the last four years,and sold them all at a tidy profit at the beginning of last year.(before the bubble burst)

In some cases i made 400% profit.
At this stage i am waiting for the banks to start reposessing houses.

Is it true that banks are prepared to accept offers of 80% of the outstanding bond?

Half my town is up for sale.I personally haven't seen as many houses for sale in my life before.Not even in 1993/4.

I think a lot of houses will go on auction soon.Would it be better to bid on an auction or should i approach the banks and make offers?

Thank you.

 

[Highflyer_GP]

Property booms don't last forever. And since I missed the last one because I was still a student, I can't wait for this bubble to burst in order to purchase when the prices drop, and then catch the next boom.

 

[Piepalook]

Property booms don't last forever. And since I missed the last one because I was still a student, I can't wait for this bubble to burst in order to purchase when the prices drop, and then catch the next boom.

Tip: Buy 6 months after the rates go down.
Sell within one year after the rates go up.
Should the rates go up by more than 2% sell immediately.
These cycles takes between 8 and ten years.

Prices will go down.Not much, i think about 20%.
Better to buy on auction or reposessions.
Wait another 6 months before you buy.

 

[Pixual]

The interest rate is the de facto barometer to gauge what's going to happen to property prices.

Personally I don't see how they can remain at their current levels, especially since we are swinging towards recession. I believe we've seen a drop of about 15% already based on hikes of around 4500 base points (10% to 14.5%).

The problem Tito faces now is that the economy can't sustain lower interest rates because SA then becomes unattractive for foreign investment. It also can't sustain higher rates because if he puts them up too much the banking system will collapse in much the same way that the article on iAfrica recounted the collapse of my old employer, NBS.

There is no way that the likes of ABSA, Nedbank, FNB and Standard Bank can afford to post losses like we did in 1998/9.

If Tito keeps the rates as they are now inflation will spiral. So basically he's painted himself into a corner.

 

[Highflyer_GP]

The interest rate is the de facto barometer to gauge what's going to happen to property prices.

Personally I don't see how they can remain at their current levels, especially since we are swinging towards recession. I believe we've seen a drop of about 15% already based on hikes of around 4500 base points (10% to 14.5%).

The problem Tito faces now is that the economy can't sustain lower interest rates because SA then becomes unattractive for foreign investment. It also can't sustain higher rates because if he puts them up too much the banking system will collapse in much the same way that the article on iAfrica recounted the collapse of my old employer, NBS.

There is no way that the likes of ABSA, Nedbank, FNB and Standard Bank can afford to post losses like we did in 1998/9.

If Tito keeps the rates as they are now inflation will spiral. So basically he's painted himself into a corner.

Is there a way of telling when interest rates will be approaching their peak (either high or low)? Or is it pretty much dependent on external factors only?

 

[BiteMe]

have a look at this
http://www.scribd.com/doc/2073735/Subprime-for-dummies

relates to the US dilemma, and the coming UK recession.

I am pretty sure quite a lot of it translates to South Africa as well..may just help explain how this happened.

P.S. I take it house prices, going up in value, i.e. INFLATING, are somehow magically also not linked to the S.A. INFLATION rate, so they can brag about how low the inflation rate is, then pat themselves on the back for coming up with a scheme that makes it look that way.

Interest rates are one thing, but if the banks decide to get a bit more cautious with who they lend money to (credit crunch) then house prices drop.

also, if you got the bandwidth spare, watch this on youtube
http://youtube.com/watch?v=wmPH56aScDA
there are (i think) 5 segments, but they should all be linked in the sidebar. The program aired on british tv on monday, explaining exactly how deep the poo-poo is.
Dispatches: How the banks gamble with yoru money.

 

[DJ...]

OK, lets put this into a little perspective. The US property market was hit by the sub-prime crisis and SA is in no way affected by this as we didnt invest in the US ABS market. The US sub-prime crisis has and will have little affect on SA unless the US goes into recession, which in actual fact can be to our advantage if we play our cards right. Also, SA bases its interest rates on inflation only. Other more stable economies dont, like the US. The two cannot be compared against each other as it is a ridiculous analogy. Interest rates are not calculated by reserve banks the same way throughout the world.

Also, it wasnt merely the interest rates which sparked the massive increase in property prices. The emerging black middle class played a large affect (read the research papers published by the banks) and many other factors including the Silicon Valley crash created the market as it meant investors looked for alternative investments. There were many factors that contributed tpwards the massive property price increase, and you mentioned hardly any of them.

If you listened to the latest budget speech, you would know that inflation targets have risen to 7.1% for 2008 and 4.9% for 2009. It stands to reason then that if govt actually achieves these targets, there is absoluely no reason to increase interest rates and therefore he ropery market will actually boom towards the end of the year.

Property prices in SA were undervalued too, which is partly the reason for the increase a few year back, however they are certainly not over-valued by current industry norms. The 24% repo rate (not interest rate as incorrectly stated) was under unique conditions and was corrected fairly quickly and efficiently.

As for the inflation affects of the property boom, the money was spent IN SOUTH AFRICA. regardless of what it was spent on, the money remained in the country and has a minimal affect on inflationary pressures unless the goods were imported.

We are not headed towards a property crash IMO (and I am not an estate agent for the record - I am an investor). I beclieved a few months basck that we would see another boom in the property sector towards the end of this year, however due to the instability of the markets (both locally and globally), I foresee the boom being more of a pop than a bang! Markets will stagnate but there will still be money to be made.

 

[BobbyMac]

Property booms don't last forever. And since I missed the last one because I was still a student, I can't wait for this bubble to burst in order to purchase when the prices drop, and then catch the next boom.

Yeah.

Property trends are extremely cyclic, and thanks to the way SA banks finance fixed assets its far better to own property than to lease it. There will always be an upswing, and right now things are balanced on a knife edge. I've now sold all my fixed assets - houses and office complexes - and am currently renting while we finalise our move. I was going to hang on to a lot of the property, but with all the skeletons in the South African economical closet, I don't think it's worth the risk. I've seen an upswing in auctions in the estate I stayed in last month still, so now is definitely the time to start bargain hunting (on auctions especially). In my opinion, I think houses in South Africa are priced roughly double what they're worth.

 

[Omac]

There were many factors that contributed tpwards the massive property price increase, and you mentioned hardly any of them.

I wanted to say that!

Has the new crdit act not played a major role in halting the rise in property prices, and did the same act not cause a "rush to buy" just prior to it becoming law?

 

[Pixual]

Also, it wasnt merely the interest rates which sparked the massive increase in property prices. The emerging black middle class played a large affect (read the research papers published by the banks) and many other factors including the Silicon Valley crash created the market as it meant investors looked for alternative investments. There were many factors that contributed tpwards the massive property price increase, and you mentioned hardly any of them.

As a former banking analyst I must disagree with your position. When money suddenly becomes cheaper to borrow (practically overnight), things start looking a whole lot more affordable for consumers. House prices rose not because of an emerging black middle class, they rose because they became more affordable to own and the demand for them went up.

If you listened to the latest budget speech, you would know that inflation targets have risen to 7.1% for 2008 and 4.9% for 2009. It stands to reason then that if govt actually achieves these targets, there is absoluely no reason to increase interest rates and therefore he ropery market will actually boom towards the end of the year.

Then why are there so many houses on the market right now? Why has the house I am renting, which was valued at R1.6m in 2006 just been sold for only R1.28m? The reason is because consumers who over-extended themselves at 10% can not afford to service the same debt now at 14.5%. On a R1m bond that variance translates into a monthly instalment increase of R3,327. Not everybody who earns a fixed salary can suddenly come up with that every month.

Property prices in SA were undervalued too, which is partly the reason for the increase a few year back, however they are certainly not over-valued by current industry norms. The 24% repo rate (not interest rate as incorrectly stated) was under unique conditions and was corrected fairly quickly and efficiently.

They were undervalued to a certain degree, yes, but no economy can sustain a 300-400% increase in property prices over a short period like 5 years. Something's got to give.

BTW, the repo rate never went to 24%. The prime rate did. The repo rate is the rate at which banks borrow from the reserve bank or the treasury. They then sell that money on a mark-up: the prime rate.

As for the inflation affects of the property boom, the money was spent IN SOUTH AFRICA. regardless of what it was spent on, the money remained in the country and has a minimal affect on inflationary pressures unless the goods were imported.

The point is that the money was not spent on things that would build the economy at a fundamental level. Instead of using R500,000 equity to start a new business the average consumer spent it on luxury items that resulted in a short term buoyancy of the economy. People like me who were involved in home improvement businesses were smiling. That equity boost did wonders for our personal spending power, but it didn't do anything meaningful for the economic muscle of the country as a whole. Money got spent on the wrong things.

We are not headed towards a property crash IMO (and I am not an estate agent for the record - I am an investor). I beclieved a few months basck that we would see another boom in the property sector towards the end of this year, however due to the instability of the markets (both locally and globally), I foresee the boom being more of a pop than a bang! Markets will stagnate but there will still be money to be made.

You're living in cloud cuckooland. With the new credit act and the expensive cost of borrowing (read higher interest rates) where are all these buyers going to come from to support your theory of increased demand for house ownership?

 

[BTTB]

After 98/99 when the Reserve Bank hiked Interest Rates over 20% I swore never to loan money again and to a certain extent I have kept to that except for a couple of vehicles on Instalment Sale Agreements over no more than 36 months at prime minus.
I also recall The Reserve Bank wasting in excess of 40 Billion Rand trying to prop up the Rand to no avail as The Rand just kept sinking.

Thinking back to 98/99 I recall good business sentiment and consumer spending was on the up until the rest of the World decided that emerging markets or whatever weren't the flavour of the month any more.
We were almost pushed into a recession scenario based on world sentiment and not our own and I found it odd that Business was actually picking up at the time but all the international pressures were holding us back.

If you look at the best growth on our Stock Market and Property Market, it was during the period when Interest Rates were kept on hold.
There is talk of a Fixed Interest Rates for Home Owners. Not sure how far that plan is down the road, but it would take the volatility out of the Housing Market.
The trouble is that without Volatility, Stock Traders don't make money as weak holders falter as a result and a similar picture applies to Property as it usually creates more Sellers than Buyers and since the new NCA people are not qualifying for Bonds like they used to heightening the disparity between the two.

My 2 c for the am.
Have a goon one.
Cheers.
BTTB.

 

[Turtle]

As for the inflation affects of the property boom, the money was spent IN SOUTH AFRICA. regardless of what it was spent on, the money remained in the country and has a minimal affect on inflationary pressures unless the goods were imported.

That's not entirely true as most people buy houses on credit, an increase in the supply of credit has basically the same effect as printing more money, i.e. inflation; debt is a kind of currency. Also a 'much bigger house than you need' is effectively a luxury good and doesn't create new wealth as a 'proper' investment can, as has been pointed out. (Also estate agents made a killing and many spent that money on crap like big cars.) We've been using credit to buy fancier lifestyles than we can afford (unnecessarily big cars and houses) instead of e.g. using it to invest in ventures that lead to real growth, that can't have a neutral effect on the economy.

 

[Sneeky]

Interesting post!

We are up a creek with no paddle, oil at all time high with a very weak rand is going to put massive pressure on rates.

I think is a lot more heartache to come for those with new bonds especially as people always tend to push the envelope when purchasing a property to live in.

I know many people with bonds that are stuck in the trap that Amazulu mentions where they have bought all sorts of nice goodies and toys on their bonds and now really cannot pay for it anymore. It is only cheap money if you paid it back fast. Now it can cost them their homes

 

[ToxicBunny]

Yeah.. I know 1 or 2 ppl like that as well

But in the long run it might benefit me since I missed this property boom, and now can't afford property.. hopefully in a little while I will be able to afford property again.

 

[Pixual]

Interesting post!

We are up a creek with no paddle, oil at all time high with a very weak rand is going to put massive pressure on rates.

I think is a lot more heartache to come for those with new bonds especially as people always tend to push the envelope when purchasing a property to live in.

I know many people with bonds that are stuck in the trap that Amazulu mentions where they have bought all sorts of nice goodies and toys on their bonds and now really cannot pay for it anymore. It is only cheap money if you paid it back fast. Now it can cost them their homes

Dude, I've seen it happen at the coalface and its scary. I said to people 5 years ago, shortly after I left the bank, that there was going to be a BIG bump in the road. That bump is happening now and to be honest I don't know how this country is going to survive it. I think the wheels may come off completely this time.

South Africa has too much reliance on debt. Interest rates MUST go up in order to attract real investment from abroad and deter people from over-extending themselves with medium and long term debt. Tito is between a rock and a hard place, all because of his own doing.

 

[Omac]

Interest rates MUST go up in order to attract real investment from abroad ..............

How does this work? (in short & simple terms please)

 

[BobbyMac]

How does this work? (in short & simple terms please)

Foreign (actually all) investors expect a return on investment. Rising interest rates guarantees such a return.

 

[Sneeky]

I need to ask a stupid question considering the economy as a whole, so what if people loose their homes and the property price plummets, why is this a bad thing when looking at it from a non individualistic perspective?

We don't save money in SA cause it is not conducive to do so and your are in effect penalized for savings via tax.
Higher rates mean better incomes for pensioners and those that do rely on savings and it goes a step closer to slowing reckless spending while encouraging saving to a degree.

Instead of people making ridiculous amounts of money in the property market they would just shift their investments to other more lucrative markets.
In certain segments of the property market now you would make more money with your cash in a Eplan savings account than if you owned property such has the growth rate slowed.

Sure estate agents in BMW coupe's selling townhouses that cost R400 000 2 years ago for R1 000 000 today will whine, but quite frankly, fuggem and John Loos will still tell people to buy, he reminds me of that Iraqi information minister during the gulf war, Comical Ali.

 

[BTTB]

Interest rates MUST go up in order to attract real investment from abroad and deter people from over-extending themselves with medium and long term debt. Tito is between a rock and a hard place, all because of his own doing.

I agree and disagree only because you used the term "real" and I assume that you mean Long Term Fixed Investment by it.
The trouble imho is that High Interest Rates help those that have savings which is good, but it only attracts short term money from overseas like the Japanese Carry Trade and this is not going to help us in the Long Term as they pull there money out the moment our currency devalues as it has just done since the beginning of the year.
We need to keep the Capital created within our country here and of course make it feasible for foreigners to invest in our country with Capital Expansion Projects etc. These are the challenges and I am not sure how this is going to happen in the short term when Business Sentiment is a at a low ebb.

Tito should have increased rates in January by 50 basis points. I am on record here somewhere for stating that. I saw the **** was about to hit the fan in December already. Poor decision imo, but I think there was too much political pressure from all quarters to keep rates unchanged or even lower. The next move may indeed be up?