Home is no longer where the heart is for big banks
The margins on the home loans business have been further squeezed by bond originators
A homeowner who finally pays off his house this year could have listened to Ricky Martin's fresh hit "Livin' la Vida Loca" on the way to the bank when applying for the loan.
Buying a house is a long-term commitment-often a 20-year relationship for both the client and the bank.
But home loans are not all the rage any more. SA's banks are singing a different tune from a decade ago. They have become much less reliant on home loans as the economy stagnated and home buying tapered off.
"First-time buyers have been driving the market," said Old Mutual Equities analyst Neelash Hansjee.
But with weak growth and high unemployment, not as many prospective new homeowners are entering the market. Those who do often struggle to qualify for home loans as they do not satisfy the affordability requirements.
Banks themselves, after suffering heavy losses during the financial crisis in 2008 and 2009, have also been very cautious in granting home loans since.
Absa, which used to be the market leader, tightened the screws as British parent Barclays tried to keep mortgage lending risk as low as possible.
"All the other major banks gained market share from Absa, but Standard Bank was the big winner," said Hansjee.
Standard now has the largest home loans book, with Absa second. But apart from profiting from Absa's decline, home loans have been a low-growth business for banks. And they have looked to other sources to pad the bottom line.
"Home loans have become much less important for the big four banks. In retail banking, transactional fees, credit card and unsecured lending have been bigger growth areas," said Sanlam Investment Management head of equities Patrice Rassou.
Banks are also not luring clients with the same lower-than-prime interest rates of the first decade of the 2000s.
Before the financial crisis, home buyers could shop around for rates substantially below the prime interest rate. But banks themselves have had to pay more for funding, as credit ratings downgrades have driven up their cost of borrowing in the market or from other financial institutions, Hansjee said.
Eventually, banks pass on the higher funding costs to their longer-term loans, which means it inevitably puts upward pressure on mortgage lending rates.
"More onerous capital requirements have led to banks focusing away from this low- margin [but] highly capital-intensive [and] long-duration area towards more profitable lines of business like card and unsecured lending, which are [of] shorter duration and higher margin," said Rassou.
The margins on the home loans business have been further squeezed by bond originators, which have been pitting one bank against the other for the best rate.
Behaviour has also changed with stricter regulation. Equity in home loans used to be a convenient source of savings to dip into when other large purchases such as cars and education were made, but this has slowed.
"Ten years ago, people used their mortgage facility for more than just homes and at their discretion. Banks have since tightened up and are now better at lending for a specific product," said Hansjee.
So when a client buys a car, they get vehicle finance. When paying school fees, they are more likely to finance it with personal loans.
But Absa has in recent months indicated it wants to claw back some of the market share it lost in home loans and Hansjee thinks this could shake up the competition in the home loans space.
But it will be tough taking market share without compromising on price, which could put further pressure on the profit margins of the home loans business.
Until the South African economy returns to sustainable growth, demand for home loans will remain subdued. Confidence plays a role, more so in the higher end of the market, where the well-to-do would likely not like to tie down their capital in property in a time of economic uncertainty.
At the lower and middle end of the market, affordability is a bigger issue, said Hansjee.
This is where the threat of unemployment - with many companies shedding jobs as the economy stagnates - looms large for prospective home buyers, especially when a double-income household slips back to a single income. And inflationary pressures such as rising electricity costs and a fuel price spike hurt home buyers in the lower to middle market especially hard.