Daniel Steinmann
1 August 2008
analysis
Windhoek — The home loan base rate is exactly the same as the Prime Interest Rate - 15.25% here and 15.5% in South Africa. This is usually the norm, but there was a time, several years ago, when the home loan base rate was 0.75% below prime.
I think it is time again that the banks consider reducing the home loan base rate, only this time I am advocating a 2,25% drop.
Many households are under pressure. This is due to a combination of price increases, all attributable to either inflation or interest rates while incomes are mostly static. If other households are like mine, and I assume most are, then they have bought their homes for a price they could not really afford, bargaining on appreciation to help them breathe again after about 18 months.
But this scenario only works out when there is relative price stability for the other items typical of a household monthly expenses basket. The moment one has a situation like now, where fuel, groceries, consumer goods and interest rates all rise at the same time, at some point or another, many households find themselves in trouble.
Mortgages form a significant part of any commercial bank's assets. The home book often constitutes as much as 30% of total assets and usually more than half of all asset finance. So for the banks to drop the home loan base rate by 2,25% to 12%, they will forfeit an enormous amount of money. But for them to keep the home loan base rate the same as prime may cause them to lose much more.
About a month ago I heard a staggering statistic from South Africa. From the beginning of this year to the end of May, some 73000 homes came under the auctioneer's hammer. Multiply that by a conservative five and it immediately shows the social calamity in the making: More than 360 000 people lost their shelter.
Although the scale is much smaller, I believe we are facing an equally serious situation.
Lets look at the implications.
Taking a modest home loan of half a million dollars, at 15.25%, the owners pay N$6 354 per month on interest alone. The amount he or she pays for the capital debt depends on the loan's structure, but even here, there is very little room to manoeuvre. At 12%, the owner pays N$5000 per month. The difference does not seem that big except that one must remember, families gradually develop financial problems as they see their own properties becoming too expensive for themselves as interest rates go up. They do not get into trouble overnight. The idea is to create a situation where a family with problems will gradually get out of it again by increasing their monthly disposable income until such point where the economy has become rational again.
The only major difference between the affordability for one family as opposed to another is the repayment cycle. For the first ten years of a typical 20-year mortgage, the owner basically pays only interest with a minute capital component. This gradually swings around but it is only in the second 10-year term that this ratio changes significantly. So homeowners in the first half of the cycle will have less room to move, and less equity captured in their properties than those in the second 10-year period. For mortgages over 30 years, the picture is much the same except that the cycle is longer.
Since a house is such a big capital investment, it is for most families the most important and valuable investment they will ever make in their lives. And one of the reasons why property mortgages are structured over such long cycles is because property is expensive no matter which way one looks at it.
Another aspect we need to keep in mind is that a significant part of any national economy is captured in the capital value of its fixed investments of which property constitutes a very big slice. If it is our intention to maintain some economic stability in a time when living costs are rising and property values are decreasing, the last thing we should do is to destabilise the economy further by undermining property values. And it is for this very basic reason that I am saying now is the time where the banks can really demonstrate their social responsibility. Be prepared to accept a lower rate on home loans, forfeit some of your profits but help ensure better stability in general and a much faster recovery, later on, in particular.
Bottom line is, we want homeowners, especially primary homeowners with only one property, to be able to stay in their homes so that when the economic cycle turns they can contribute again to the growth.
I am not concerned about families with a second property. My main concern is ensuring people do not lose their shelter. I am all for a somewhat deflated property market, especially given the property exuberance until about a year ago, but I do not want homeowners to lose their homes. For most, it will later prove to be their only source of collateral. Protect ownership now and see the much faster recovery later on.
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