Can you pay your bond?

[sox63]

The rising interest rate is exactly the reason why I have put off buying property. And recently on the property websites, I read that houses are selling for 15-20% below asking, is this going to get worse?

OT - Where can I find listings of property that is going up for auction?

 

[flarkit]

What an excellent, practical and insightful thread. Thanks to the skilled posters who are presenting very interesting information. I am learning lots about our economics from you people

Thanks again

 

[Pixual]

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

We want money to flow into SA, so to make that happen we offer higher interest rates to investors.

You've got a billion dollars to invest. Do you put it into something where you are only going to get 7% or do you put it where you can get 12%?

Tito's dilemma is that if he increases rates dramatically now it will cause panic, because as those clips on YouTube show, the entire financial system is dependant on the ability of the people at the bottom of the food chain to continue servicing their debt. If people cannot service their mortgages or car loans anymore the banks take the hit. If the banks take the hit their share prices fall and people who have money in the bank try to pull as much of it out as they can.

Want to gauge investor sentiment? Just watch the gold price. When the price of gold goes up, you know there's trouble afoot! We're getting really close to $1,000 an ounce now.

 

[Piepalook]

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?

In my opinion interest rates would have to rise,money is flowing out the country faster than it comes in.
In an effort to try and stop the outflow of money,i predict that interest rates has to rise by a further 1 % in the second quarter.
I think we wil not see .5% increases again soon.

 

[Piepalook]

We want money to flow into SA, so to make that happen we offer higher interest rates to investors.

You've got a billion dollars to invest. Do you put it into something where you are only going to get 7% or do you put it where you can get 12%?

Tito's dilemma is that if he increases rates dramatically now it will cause panic, because as those clips on YouTube show, the entire financial system is dependant on the ability of the people at the bottom of the food chain to continue servicing their debt. If people cannot service their mortgages or car loans anymore the banks take the hit. If the banks take the hit their share prices fall and people who have money in the bank try to pull as much of it out as they can.

Want to gauge investor sentiment? Just watch the gold price. When the price of gold goes up, you know there's trouble afoot! We're getting really close to $1,000 an ounce now.

True.
Some people rejoice when the gold price rices.
The higher the price the bigger the trouble.
Investors, when scared, buy gold.
If both the oil price and gold price rise,like what has been happening,
it means that investors are extremely jittery.

 

[BTTB]

True.
Some people rejoice when the gold price rices.
The higher the price the bigger the trouble.
Investors, when scared, buy gold.
If both the oil price and gold price rise,like what has been happening,
it means that investors are extremely jittery.

Another theory is the psychophysical number of $1000 US which is where Gold is heading by the looks of it. Analysts are talking the price up to this level.
The trouble is now The Jewellery Industry will pull back on the higher prices. It is a vicious circle.
I think Gold is a stupid commodity. People dig gold out of the ground at considerable expense and effort and then place it in a Safe to gather dust and have to pay someone to stand around and look after it. Waste of space and manpower. Think Fort Knox as an example.

For all intense and purposes if Gold had to have tracked inflation since it touched around $800 US in 1980 the actual price of Gold would be closer to $4000 US.
If you see Dr Clive Roffey's analysis on Summit TV you would be wondering why you haven't bought Gold Shares or Exchange Traded Funds long ago. At some stage Dr Roffey will be right about The Gold Bull Market.

 

[The_Unbeliever]

We're managing to pay our bond.

But we have cut all other expenses (luxuries, etc) in order to do so.

 

[BobbyMac]

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?

Apart from people possibly becoming destitute and a further burden on the state, there are a vast number of other implications. In a nutshell, it causes problems across many sectors, from the banking sector all the way to industrial and development sectors.

When homes are repossessed and sold for a loss, the lending institution's bottom line is hit, obviously, but more acutely important to investors, is the institution's assets are negatively impacted directly, meaning that investors' capital are reduced in real terms in direct correlation to the companies balance sheet (in terms of real losses) and in terms of asset ownership. Property is largely deemed a relatively safe investment, as in theory the property should never ever lose value, only increase in value. In practice this however is not always so, as some property is simply just overvalued. In the South African market, property - especially residential property - has boomed, resulting in a rapid over-valuation of property values as demand quickly outstripped supply, fueled by lower interest rates and the ease with which to get a home loan. Economics, however, dictates that when one of the factors changes, the other contributors to the equilibrium must either contribute more to compensate, or the whole structure falls flat. We are now seeing this as interest rates were increased, home loans were more difficult to source and the cost of living increased, so the ability to service the mortgages becomes more strenuous. As everyone is in the same boat, and forced to downgrade, a sudden oversupply means that the actual prices of the property must drop - the law of supply and demand.

So, to summarise why this is "a bad thing": it indicates that as a whole there is a definitive indication that the market is poised to bottom out, and in turn that may put the banking institutions in a quandry as the bulk of their assets are tied up in property. The banking sector is one of the main pillars of the South African economy, and as such should not be rocked even in the slightest way.

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.

South Africans don't save simply because it's not in their culture to do so. In general countries where the poverty levels and unemployment situations are so high, people simply live day to day on whatever means they can. There is an incentive to save: being able to sustain a higher lifestyle, but the problem is the people that should be saving have absolutely no means to do so, simply because they're just too poor.

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.

A very small minority of people actually have enough saved to realise any income from such savings. Even out of the middle class sector, most people do not have enough saved to sustain their current lifestyles for more than a year into retirement.

Instead of people making ridiculous amounts of money in the property market they would just shift their investments to other more lucrative markets.

Investors generally are quite apt at picking the right thing to invest in, and most will likely rely on a reputable company to invest on their behalf. However, in the South African property market, the residential sector is largely governed by home owners - and not investors.

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.

Most people investing in property would likely not be investing in such high risk developments and sectors anyway.

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.

That's not quite the thing though. Many South Africans buy houses with the intention of that comprising the bulk of their savings. If the property market bottoms out, the banks lose, the economy loses but most notably, the people who are using property as savings vessels lose, in turn impacting the economy very negatively.

 

[Ady]

Damn at this rate i can't even afford to get a bond let alone pay one.

 

[vespax]

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.

This is something I have been asking people since coming to SA. Homeowners are the ones investing in their local economies, and creating personal wealth that can than be leveraged into other ventures later on (business, education, etc). So why have a flexible interest rate and penalize those that are making good contributions to the economy?

Keep rates flexible on cars, credit cards, furniture, etc. But houses should be fixed and allow people to grow their asset without fear of an increase in rates a month or two down the road. (even fix rates on primary residence and than flexible on secondary/investment property? just an idea..)

This is where the Sub-prime issue hit the US, and I think it is also hitting SA homeowners. Sub-prime borrowers were not able to qualify for the houses they actually bought, but they were enticed by the low rate for the first few years of the loan. Now they are in trouble. Those who bought their houses on fixed rates (say 7%) are doing much better in the US than those who bought on 5/25 ARM loans.

A similar situation in SA is happening. People bought when rates were low. Now rates are higher and projected to go even higher, they are getting squeezed out of their property exactly like in the US sub-prime scenario.

 

[Toffee]

have been working in banking(4 major Banks)and in particular asset based finance since 1979. I would say that from a banking perspective I can talk with some authority. Must agree with most of the comments by DJStealth.

We have had much worse times in the repossesion of houses/home loan arrears in the past than what we are experiencing now. The NCA has had a massive affect on both Home Loan and Vehicle Finance over the past 7/8 months. People are scared to sell in case they do not qualify for a home loan to purchase a new property. We recently had a case of a client who qualified for a bond of R1.8 million a year ago only qualifying for a bond of R1.5 million, so it is a reality. As a result not as many people are buying/upgrading to better areas etc. This leads to the old supply and demand theory and why people are not selling at previous prices. People are resiliant and will find ways to improve affordability/credit records and in a year or two we will have adapted to the NCA and business will be back to normal. Experience in other countries also shows this. An example of this is a client, who together with his wife had 7 clothing/credit cards, which had low/nil balances, but in terms of the credit act, all this "potential" debt has to be taken into account when calculating affordability. We declined his bond, he went and closed all the credit cards/clothing accounts, reapplied and we approved the bond. People will learn these processes. The truth is that my employers, the Banks, have been very irresponsible over the past few years in dishing out credit and credit cards, which has also compounded the problems.

Someone asked if banks were accepting 80% of the price of properties when they sell them in sale and execution. Not really. When the banks sell a repossesed house, their main aim is to try to settle all/as much of the debt as possible. If you can find out how much is owed on the property you may have an advantage when you bid for the property. When they attend the sale they will have an idea in mind of what they can collect so it is a bit of a balancing act. I must have attended over 100 sales for the Bank over the past 28 odd years

 

[marine1]

Affect or effect?

 

[Toffee]

Oops effect! My excuse is the age thing.

 

[Piepalook]

We're managing to pay our bond.

But we have cut all other expenses (luxuries, etc) in order to do so.

In 1994 i bought a house at 17% interest.
Within 4 years interest rates went up to 23 or 24 percent.
We barely survived.
That was, without a doubt, the worst financial time i ever experienced.
We cut all luxury items.It really was a struggle for survival.

I know it sounds stupid ,but hang onto your house.

 

[Omac]

In 1994 i bought a house at 17% interest.
Within 4 years interest rates went up to 23 or 24 percent.
We barely survived.
That was, without a doubt, the worst financial time i ever experienced.
We cut all luxury items.It really was a struggle for survival.

I know it sounds stupid ,but hang onto your house.

Doesn't sound stupid to me!

 

[diebaas]

Damn at this rate i can't even afford to get a bond let alone pay one.

Dont feel alone I feel your pain

 

[Sneeky]

Thx Bobbymac, no doubt many factors come into play and as some suffer others will benefit.
But the banks it seems have made their own bed, as in the US?
Now they are being bailed out with lowering of rates to stop the rot, something which we apparently can not afford to do as a developing country under the kosh.

With regard to savings and interest rates I was talking about people 'surviving' on their savings, not maintaining a lifestyle they once enjoyed.
My parents are pensioners on the breadline and rely on income on very small investments, rates increases are really good news for them, they have suffered a lot on the downward trend.

South Africans indeed have a culture of home ownership but in reality most will not loose their homes. The retail markets (as indicated in this years xmas spending) will take big knocks first.
There was such a massive growth in house prices over the last 4-5 years that those who bonded themselves in the last year or 2 will be under immense pressure for sure but those before that I think will just cut down on their so called luxury items and petition for separation of interest rates and bond rates as their std of living will be compromised.
I suppose this all affects each segment of the population differently though.

Also this surely creates opportunity for those who are not in the property market to get in.
This is a welcome correction in the market imho and long overdue.
Tito's only mistake has been to cushion the increases with 0.5% increases when many called for a bolder message from the reserve bank to curb the reckless spending.
We are in for a big slowdown and correction, whether it is a bubble or not depends on how the banks apply themselves to offering credit.

 

[BobbyMac]

Tito's only mistake has been to cushion the increases with 0.5% increases when many called for a bolder message from the reserve bank to curb the reckless spending.
We are in for a big slowdown and correction, whether it is a bubble or not depends on how the banks apply themselves to offering credit.

The mandate of the reserve bank is to keep inflation in check, and Tito should have acted sooner and more decisively. The curbing of spending on credit was unfortunately left for far too long. The governor should have stepped in earlier to prevent the massive credit spree the months before the NCA came into effect as well. Unfortunately hindsight is always 20-20 vision - especially in economics.

 

[Pixual]

Thx Bobbymac, no doubt many factors come into play and as some suffer others will benefit.
But the banks it seems have made their own bed, as in the US?
Now they are being bailed out with lowering of rates to stop the rot, something which we apparently can not afford to do as a developing country under the kosh.

Exactly.

When the SARB started lowering interest rates in 2003, and continued to do so until just recently I thought, "Uh-oh. Here comes trouble." As I said in the beginning, it feels like deja vu.

Home ownership is a long term thing. The panic buying that we saw over the past 5 years has created an economic tinderbox, not completely dissimilar to the sub-prime situation in the US. If those people who paid stupidly inflated prices for their homes during that period have to deal with the possibility of continually rising interest rates, there will be a huge problem with our economy.

Sure, we aren't seeing repossessions yet, but they could be right around the corner if rates carry on upwards. The current property values are unrealistic and if the banks are forced to repossess then we'll be right back to where we were 10 years ago, the main difference being the level of risk exposure the banks have now compared to then.

What they might consider doing, as was the case in Khayalitsha and several other townships we had bad exposure in back in the 90's, is to ring-fence the bad mortgages and re-structure the finance, possibly with balloon payments, like they have with cars. It would be better to have the owner of the house remain in the property paying something towards the debt than to kick him out and take a loss on sale in execution. The banks problem, as was the case with Northern Rock, is that they may not find the backing to do that effectively. Do they turn to the government like we did with Khayelitsha in the 90's? Can or should the government bail out such irresponsible lenders?

If the bank repossesses a property they have to pay all outstanding rates and maintenance on it too, PLUS they still have to service the debt on their asset book to their treasury. Severe bleeding of cash!

It's an impossible situation, but such is the stuff of poor monetary policy. I'm just grateful that I am renting these days. If I had to buy the house I live in my monthly commitment would be twice what I am paying in rent. It's a no-brainer for me. Rent now and buy when the poo hits the fan again.

 

[Pixual]

In 1994 i bought a house at 17% interest.
I know it sounds stupid ,but hang onto your house.

Not stupid at all, but whatever you do, pay off your bond as soon as you are able to. Don't ever use the equity in your home to finance other purchases. If you can't afford it, don't buy it!