Housing Affordability: How First-Time Buyers are Coping

First-time homeownership remains a challenging goal for many South Africans, particularly the youth. Despite a brief period in 2020/21 when interest rates were cut to record lows, participation by young buyers, defined as those under 35 years old, has continued to decline steadily since 2010. This is according to insights from the latest FNB Estate Agents Survey that looks at understanding how first-time buyers are navigating a tight monetary policy environment.

The growing disparity between incomes and house prices

The survey reveals a significant increase in the number of real estate agents who believe that incomes have not kept pace with house prices. Since the start of the interest rate hiking cycle in the second half of 2021, the proportion of agents reporting that incomes have fallen “far behind” house prices has surged from 24.5% to 39% in the first half of 2024. This highlights the growing disparity between what people earn and what they need to pay for housing amid elevated debt-service costs.

Consequently, home loan volumes have fallen below pre-pandemic levels, reflecting the difficulty many South Africans face in securing financing, especially first-time buyers. The high cost of servicing debt, combined with stagnant wages, makes it increasingly difficult for new entrants to the property market.

Shifts in financing down payments

Another notable trend is the shift in how first-time buyers finance down payments. Traditionally, many relied heavily on 100%+ loan-to-value (LTV) home loans, which allowed them to purchase homes without needing a substantial down payment. However, tighter lending standards have made these home loans harder to obtain.

The survey shows a decrease in first-time buyers using 100%+ LTV home loans as their primary funding source, from 72% in the first half of 2021 to 66.5% in the first half of 2024. There is also a notable decrease in reliance on personal savings, likely due to rising living costs. A low proportion of first-time buyers have adequate personal savings to make a significant down payment.

Increased reliance on unsecured loans and government subsidies

To bridge the affordability gap, first-time buyers are increasingly turning to unsecured bank loans and government subsidies. According to the survey, the reliance on unsecured loans, which come with higher interest rates and shorter repayment terms, has risen sharply from 2% in the second half of 2021 to 11.5% in the first half of 2024. This indicates that first-time buyers are taking on more financial risk to enter the market.

Government subsidies, like the First Home Finance (FHF), formerly known as the Finance Linked Individual Subsidy Program (FLISP), are also playing a more critical role. The survey shows a near doubling in the use of FLISP as a primary source of deposit since interest rates started rising, from 3.5% in the second half of 2021 to 6% in the first half of 2024. This highlights the importance of government programs as an instrument to bridge social inequalities.

Broader consequences of decreased affordability

Decreased affordability has broader consequences. When potential buyers are priced out, housing demand slumps, impacting everything from property values to construction activity. This, in turn, can hinder job creation and economic growth. A weaker housing market can have a ripple effect, affecting related industries and overall economic stability.

However, there are signs of potential relief on the horizon. With slower price pressures and potential interest rate cuts, there are indications that buying activity may have bottomed out. Lower interest rates could further support potential buyers and revitalise the housing market.

Navigating the current market

For first-time buyers, navigating the current market requires careful financial planning and consideration of various funding sources. Here are some practical tips:

1. Explore all financing options: Beyond traditional home loans, consider government subsidies like FLISP. Understand the terms and risks associated with each option. 

2. Save aggressively: Even though saving for a down payment can be challenging, creating a disciplined savings plan can make a significant difference. 

3. Seek professional advice: Consult with financial advisors and real estate professionals to understand the best strategies for your situation. It is also advised that you speak to a home loan expert who can not only help you get a clear picture of what your credit score is, what you can do to improve it but can also help you see what kind of loan you might be able to qualify for.

4. Monitor market trends: Stay informed about interest rate changes and housing market trends to make timely and informed decisions.

5. Budget wisely: Ensure that your housing budget includes all associated costs, such as property taxes, maintenance, and insurance. Here are our top tips for stretching your household budget