FINANCE FEATURE: High interest rates wrecking young homeowners’ dreams

There comes a time when all birds must fly the nest and leave the comfort of their parents’ home, but for Generation Z, the time is nigh, and it seems there may be nowhere else to land.

“Out of reach.” “Impossible.” “Unaffordable.” These are the words used by members of Generation Z (Gen-Z) on the possibility of buying their own house in their twenties, according to an experimental Instagram poll of 38 respondents run by Wits Vuvuzela.  

However, a 2022 Rocket Mortgage survey revealed that 72% of their Gen-Z sample (2000 people of ages 18-26) are highly motivated to buy a home in the near future but, as interest rates reach their highest peak in 15 years this month, buying a house in South Africa is more expensive than ever.  

The South African Reserve Bank responded to a world-wide increase in inflation rates, which neared the 8% mark in South Africa at the end of 2022. Raising the bank repo rate to 8.25% meant that the prime lending rate rose to 11.75%, the highest it has been since the aftermath of the 2008 financial crisis. A higher lending rate means that taking out large loans from a bank, such as a bond on a house, becomes more expensive. For younger generations hoping to live on their own, this has added another obstacle to an already almost impossible dream. 

“Unfortunately, it is very difficult for young people to purchase property in this country. The current interest rates are higher than they have been in years, economic times are hard – many young people don’t have good credit scores which negatively affects their lending profile and many young people are not aware of the upfront costs that are required when purchasing a property [bond and transfer costs],” says Rob Pound, a real estate agent working in Johannesburg.  

The latest FNB property barometer reveals that first-time-buyer numbers are on the decline and the average age at which South Africans can afford their own home is 35. The report cited the rising cost of living, inflation rate and unemployment rate as causes for so few people in their twenties affording homes of their own.

This is supported by real estate agent Ronald Oliphant, a Braamfontein area specialist who said that he has seen fewer young people looking to buy or rent properties this year. Braamfontein, Ferndale and Fontainebleau remain popular areas for young first-time buyers in Johannesburg, but the latest Lightstone report indicates that only 18% of stable homeowners in Ferndale are under the age of 35. This number decreases to 16% in Braamfontein and 5% in Fontainebleau. 

For those young people who overcome financial burdens and manage to buy their own homes, the struggle does not end there. “I once had a client who was 27 years old and he found one of my properties, which was R850,000. He said he could afford it because the bond repayments would be the same cost as the rent he was paying at the time, and he was so excited to be purchasing a property rather than ‘paying someone else’s bond,’” said Pound.  “He wasn’t aware of the upfront transfer and bond costs that are required when buying property, which in his case were around R56,000. He had to come up with this money in two months in order to buy the house, but he was living hand-to-mouth, there was no way he could afford it.” 

South African banks, aware of this difficult situation, are open to giving first-time home buyers a bond of 105% in order to cover the upfront costs for properties under the value of R1.8 million. However, for this young buyer only one South African bank offered to grant him this deal.  

Jesse Van Der Merwe (24), a recent Wits engineering graduate also decided to invest in her own property when she started her working life, however, after buying her own apartment, realized that she could not afford to keep up with the day to day costs of owning a property and living alone. “I realized that I can’t really afford to live [in the apartment] and like…eat, so I’m renting it out while I stay at home until I can actually afford to move into it.” 

With unaffordable upfront costs and bond repayment rates, many young people who can afford it are pushed into renting property instead. This has led to a high demand for rental properties which, according to the FNB report, has made rental costs in Johannesburg more expensive in recent years. “Real-estate is simply supply and demand,” said Pound.  

According to Oliphant, a tenant may only be considered for a property if the rent does not exceed one third of their income, but, as rental rates increase due to high demand, many young people apply for rentals that they do not comfortably afford.  

Julia Rolle (24), a 2D character animator from Johannesburg who works remotely, made the decision to move away from the city to the seaside town of Wilderness on the garden route. To afford the rent on what she refers to as a “teeny tiny place”, Rolle pays 35% of her income on rent. When asked if she has had to sacrifice paying for other things for her accommodation, she answered, “Of course, but I wouldn’t trade the independence and having my own space.” 

Interest rates have remained steady the last two months as inflation begins to slow, giving hope to young home hunters that the situation might yet improve. However, in a press conference held on July 20 in Pretoria, Governor Lesetja Kganyago said that the interest rates have not yet peaked, “Is this the end of the hiking cycle? No it is not. It depends on the data and the risks. That’s what it boils down to.”  

In such an economic climate, some young people such as Jennifer Greef (25) have no choice but to stay in their family home for longer than they planned, “I do think I could move out, but my living conditions at home are just so much better than what they would be if I moved out because I would have to move somewhere really small,” she said. “I think still living with my parents is the right way to go about things right now because then I can save and spend my money on other things such as insurance and medical aid rather than rent.” 

FEATURED IMAGE: Feature Image: A real estate agent hands over keys to a young gen-z as they buy their first home. Photo: Kimberley Kersten 

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