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Back to fixed interest rates?

While the housing and general property market in South Africa has ended 2009 on a substantially higher note than it has been for the last 18 months, due to the global financial crisis and resultant recession, it is far from out of the woods. There is still a long hard slog ahead and it would be a miscalculation to expect a dramatic turnaround in either the buyers or the rental markets. Maybe it is time to revisit a forgotten era of more controlled mortgage interest rates.

There seems to be fairly wide consensus among property market analysts that on the housing front it can be expected to see much sustained upward mobility in the short- to medium-term, which could help to alleviate demand pressure at the middle- to bottom-end of the market.

On the back of factors like the slow to bumpy recovery in the economy and ever increasing unemployment figures, the situation is like to rather worsen even further before it gets better.

The debt pressure-experience of lower- to middle-income families during the financial crisis has also put fright into households and, even if mortgage loans should become more freely available in the near future, the uptake can be expected to be slow, putting paid to the top-end suction effect theory that was so popular in the property market in recent years.

Even at the present relative low interest rates, it is unlikely that the squeeze-effect of rising interest rates will fade from the collective memory of the present generation of households anytime soon.

It is against this background that voices are starting to go up for government intervention to effect a return to an almost forgotten era of fixed interest rates for generation long mortgage loans in especially the residential property market.

Analysing the state of the property market recently, Soula Proxenos of International Housing Solutions (IHS) referred to this issue.

She noted that mortgage providers “have made their credit criteria more exacting and have, until very recently, required large deposits from households that conventionally have little or no savings. In recent weeks, the mortgage supply appears to have loosened up a bit, but is still constrained.”

She then added that the time has come for government to encourage financial institutions to introduce fixed rate mortgages for families that qualify at current low interest rates. “These borrowers might not be able to sustain a 3% or larger increase when interest rates start climbing again and this is preventing them from taking the plunge now while rates are relatively low.

“Fixed rates or a cap on how high interest rates can go are critical for households with less disposable income. These households are the most negatively impacted on when interest rates increase and this inevitably leads to foreclosure and bank lending being withdrawn and in return impacts on the ability of developers to produce stock.
“This will make affordable housing remain in a boom-bust cycle, instead of a more robust sustainable pattern.”

The South African private housing industry, and especially the financing of the growth thereof, changed dramatically in the late 1970s when the then Minister of Finance, Prof. Owen Horwood allowed the building society industry to be gobbled up by the major banks.

Up to that point the private housing industry has seen a massive boom of residential suburb development countrywide on the back of a financing dispensation provided by a building societies sector, which provided financing based on interests rates aggregated over the life of the loan of 20, 25 or 30 years. The dispensation helped to ensure stability and security via regulations that included deposit thresholds and repayment ceilings of not more than 25% of proven fixed household incomes.

With the absorption of building societies into the banks and their retail banking business style, long-term housing loans became subject to short- and medium-term economic fluctuations.

The result was that especially lower- and middle-income households have become massively more vulnerable to these short-term fluctuations. Home ownership changed in many instances from being a basis of long-term security into a factor of short-term risk to financial wellbeing – as the latest financial crisis has proven, yet again.

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