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Housing Finance Market Overview
In South Africa, homebuyers can acquire finance for housing mainly from banks and specialised mortgage lenders but also from specialised institutions like NGOs and government agencies. The ABSA bank is the largest mortgage lender in South Africa. The ratio of mortgage debt outstanding to GDP grew from 20 per cent in 2001 to 42.3 per cent in 2007; an average annual growth rate of almost 14 per cent.
The Market from the Perspective of the Demand Side
In South Africa, loan-to-value (LTV) limits of 100 per cent (and even above) are readily available. However, the LTV ratio is dependent on the market segment and income group of the borrower. Most mortgage loans granted are variable rate loans but there are also fixed rate products on the market. The South African government is committed to the support of the housing market, especially for the lower-income strata. This commitment manifests itself especially in an individual capital subsidy scheme. At low income levels, the subsidy was intended to cover the cost of a small house with basic services; at intermediate levels, it was intended that the subsidy would be blended with private credit to produce larger, better housing outcomes. However, the vast majority of subsidised houses have been built with the subsidy only, limiting its effectiveness.
House Price Development
From 2000 to 2007 house prices have increased with an annual average growth rate of almost 22 per cent. In 2008, house prices still rose in nominal terms but were already falling in real terms. In 2009, house prices were also falling nominally.
Deposits are one of the main sources of funding for the mortgage market activities of banks. In addition, residential mortgage backed securities are used by all major banks in South Africa as a funding mechanism to fund the significant growth in the mortgage market; about 5 per cent of the outstanding mortgage loans are securitised. The non-bank mortgage lenders – with SA Home loans being by far the largest – refinance almost solely by issuing mortgage backed securities or bonds. However, in the course of the financial crisis spreads in the securitisation market widened significantly and have brought the issuance of new securities down. Especially small banks are also reliant on national Development Finance Institutions such as the National Housing Finance Corporation for funding of their housing loan portfolio.