Business Day Posted to the web on: 14 March 2007
Tighter credit rules may help sales in long term

THERE are concerns that the National Credit Act may put a damper on the residential property market, but most property analysts say it will strengthen the market in the long term.

The legislation, which aims to protect consumers from reckless lending, should put first-time buyers on a stronger financial footing, they say.

One of the first property players to voice concerns about the new legislation was the Chas Everitt International Property Group. MD Berry Everitt said in January property sales could be slowed by several weeks as banks began to implement the act’s provisions.

The act stipulates that banks must check on the overall credit exposure of any borrower before they approve any new loan.

Everitt says that to do this they have to source information about all and any of the borrower’s personal loans, vehicle finance arrangements, hire-purchase agreements, store cards and microloans, as well as home loans, from each and every lender involved.

Herold Gie Attorneys said last week that concerns existed that the act, which is set to come into effect in June, would have an “adverse influence” on the South African property industry.

“In fact the anticipation of the new act has already been cited as a contributing factor to the dampened growth in house prices, with a decelerated growth of single digits as opposed to the double digits experienced in the first six months of 2006,” said the law firm.

The firm says there is speculation that the stringent credit profiling required under the new act will slow home sales as banks begin to implement the provisions of the act and check on the overall credit exposure of all borrowers before they can approve any new home loans.

Home sellers could wait as long as 60 days to find out if a potential buyer is approved for a home loan.
But Herold Gie Attorneys says a lot of positives also come out of the act.
Director Linda Jordaan says the act introduces new rights for consumers, as well as measures that allow them to make informed decisions before purchasing on credit.

“The act basically strives to improve access to credit for consumers at a reasonable rate from a reputable credit provider, to increase the availability of finance at a reasonable cost, to ensure that increased access to credit does not lead to over indebtedness, to educate consumers about credit, to protect consumers and deal with unacceptable practices, and to enforce the regulations set out there under.”

Jordaan says the act is the “most far-reaching” consumer legislation to come into effect in years and places a greater responsibility on credit providers to refuse to give consumers credit if they cannot afford it.

Jordaan welcomes the restrictions to prevent the reckless granting of credit as they bring a measure of protection to property owners, particularly those at the lower end of the property market.

Frans van Hoogstraten, a director at Bowman Gilfillan Attorneys, says the act may slow down residential sales by developers in the short term because purchasers who do not qualify for credit will not receive the loans and will be taken out of the market.

“But I think in the longer term, it will have a positive effect because it will avoid unnecessary foreclosures, which have a host of negative financial and social consequences.”

Property economist Francois Viruly, of Viruly Consulting, says he does not believe that legislation of this nature will hurt the property market.

He says there is a “greater danger” of lower-income entrants being at risk of defaulting if interest rates suddenly move up.

The act also hampers the activity of property speculators, who may be tempted to try to obtain finance from every one of the major banks and overextend themselves in their efforts to invest in property, he says.

“The bottom line is I don’t think it is a bad thing that we look very carefully at the ability of households to service mortgages.”

One example of the problems that can occur without property checks and balances manifested itself in 1998, when interest rates surged above 25%. Viruly says many households found themselves in difficulty and unable to service their debt.

He says if first-time buyers are to be put on a strong footing, SA needs to ensure that this is done in a manner that avoids homes being repossessed when the macroeconomic environment changes.

“There may be fewer participants in the market because of the legislation, but those who do enter will do so on a strong footing.”