South African homeowners in serious trouble 

South African homeowners are showing signs of strain as many cannot afford to make the monthly repayments on their properties. 

This has largely been due to interest rates remaining elevated at 15-year highs for over a year and the cost of living rising, eating away at disposable income. 

Since November 2021, interest rates have risen 475 basis points to a 15-year high, greatly increasing the cost of financing a home. 

For example, the repayments on a R1.5 million house have risen by R4,600 per month since rate cuts began. 

Another trend that has been flagged is that many homeowners bought houses they could not afford at low interest rates during the pandemic when the Reserve Bank cut rates to stimulate the economy. 

The effects of individuals buying houses they cannot afford is being seen in the financial statements of South Africa’s biggest banks as debt-relief programs run their course. 

Last week, Africa’s most valuable banking group, FirstRand, released its annual results, which revealed a resilient performance in a tough economic environment. 

One area of the group’s business which came under particular pressure was its mortgage division, which saw its credit loss ratio rise above the company’s target range. 

The FNB owner is sitting on around R18.2 billion worth of non-performing loans related to just lending for residential mortgages. 

This was an increase of 29% compared to the year before and remained the company’s worst-performing division in this regard. Even FirstRand’s unsecured lending fared better in the past financial year. 

Other segments, such as corporate and investment banking, saw a decline in non-performing loans. 

FirstRand CFO Markos Davias told investors at the company’s presentation that it has also seen a rise in the number of clients turning to debt-relief to cope with monthly repayments. 

Davias said the rise continued throughout the second half of the year and remained a concerning trend the bank is taking note of.

The graph below shows the rapid growth in non-performing loans related to residential mortgages within FirstRand. 

This is broadly in line with industry trends, with the Prudential Authority’s data showing that defaults on home loans have risen 36% year-on-year so far in 2024. 

Old Mutual’s Savings and Investments Monitor revealed further signs of strain on homeowners. 

The monitor reveals how working South Africans, from young adults starting their careers to those planning for retirement, are faring financially. 

It showed a noticeable uptick in the proportion of South Africans approaching lenders for financial relief. 

Many have requested to make other payment arrangements, while others have taken out a loan to consolidate their debt. 

These increases are largely due to first-time home buyers being caught out by the sharp rise in interest rates following a period of unusually low borrowing costs. 

Rising defaults on residential mortgages are just one aspect of the financial challenges facing South African households, who increasingly resort to other forms of debt to sustain their lifestyles amid the escalating cost of living.

Many individuals also opt to skip insurance payments and halt their retirement fund contributions to manage their expenses.

The Prudential Authority has observed that more consumers are relying on credit cards and personal loans to cover essential needs like food and housing.

FNB’s data shows that only 17% of South Africans are debt-free, with a quarter relying on loans from family or friends.

Data also shows that around 9.9 million credit-active South Africans, about a third of the market, have missed more than three monthly payments or face adverse judgments.

However, relief may be on the way in the form of interest rate cuts, with the Reserve Bank having substantial room to begin its cutting cycle. 

Standard Bank recently said that anticipated interest rate cuts will lead to a strong recovery in the local housing market. 

The bank’s head of home services, Toni Anderson, said that in 2019, the market registered an average of R14 billion in home loans a month.  

This number surged to around R20 billion per month in 2021 and 2022, driven by eager first-time buyers wanting to capitalise on relatively stable housing prices and low-interest rates. 

Higher interest rates have pushed this volume downwards, but it remains close to 2019 levels and will most likely exceed these levels once interest rates are cut. 

Anderson also said the housing market has historically bounced back strongly after downturns. 

South Africa’s political landscape also stabilised quicker than many expected post-elections with the Government of National Unity. 

Coupled with our currency’s performance of late, there is potential for renewed economic stability, which may boost consumer confidence. 

However, the effects of interest rate cuts will not be immediate, with changes expected to take around six months to work through the economy.