Interest rates: The ‘most sensitive factor for the property market’

Rob Kelso, CEO of SA Home Loans, says while it has almost been ‘the perfect storm’ for property – where transactions have fallen ‘quite precipitously’ – with interest rates expected to be cut later this year, 2025 is likely to see a pick-up in the residential market.

You can also listen to this podcast on iono.fm here.

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Welcome to The Property Pod, South Africa’s premier property investor podcast. On this weekly podcast show, we gain insider insights from leading executives, analysts, developers and entrepreneurs in SA’s expansive property industry.

We’ve chatted about high interest rates a lot on the podcast over the last year or so. It’s March, and there’s another SA Reserve Bank repo rate decision due towards the end of the month, and most people are not expecting a cut just yet. The high interest rates are having an impact on homeowners with bonds and the residential property market.

On this latest podcast, we speak to the CEO of SA Home Loans, Rob Kelso, for his insights on the market.

SA Home Loans launched to the public back in 1999 as SA’s first non-bank mortgage lender. It was co-founded by Simon Stockley, who pioneered the securitisation industry in the country. Stockley has not been involved with the company for a long time, but when SA Home Loans was started some 25 years ago, the SA interest rate stood at a scary 23.5%.

Kelso, as current CEO, has been with the company for almost 20 years and has seen the highs and lows of interest rates in the property sector.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts. 

Rob Kelso, SA Home Loans, Residential property market, repo rate, interest rates

Rob Kelso, CEO of non-bank mortgage lender SA Home Loans. Image: Supplied

Highlights

SA Home Loans shook the market up when it was established some 25 years ago. You’ve been with the group for most of that time and have moved up the ranks. Before we get into the property detail, can you give us some insight into the company and its growth over the years?

“We’ve just celebrated our 25-year anniversary, in February, so it’s a good time to pause and look back at some of the milestones along that journey. While I wasn’t there at the start – as you said, the company’s 25 years old – I’ve been there for much of that journey, and it really has been quite an amazing ride.”

“It is a business founded here in Durban back in 1999 by a group of ex-bankers, a group of ex-bankers who’d left the old NBS [Natal Building Society] bank stable.”

“They came in looking to try and disrupt the home loan markets. Of course, at that stage, the home loan market was dominated by four big traditional banks. Interest rates were at record levels, as you’ve just said, around 23%.

“I think what SA Home Loans really did do back then as a startup was to bring competition to those banks, bring some choice for consumers, and I think it really brought to the market an ability and awareness for consumers to switch a bond to improve their interest rates, to access some equity in that home to use for other purposes, as well as a real focus on a personalised service journey with a group of dedicated property specialists. So that was where it started.”

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“I think it quickly became a national brand, clearly [providing] home loans around the country with a number of branches in all the main centres and towns of the country. Over those years there have been challenges, of course, and cycles. We’ve had global financial crises, we’ve had the Covid pandemic, and so on. And over that time, I think we saw a number of other startups, a number of other non-bank aspirants in the market come and go.”

“But the end result really has been that we have kind of built this business – which is now the only non-bank home-loan lender in this mainstream market.

“We occupy a unique position as a result. So when you’re the only dedicated specialist – home loans are what we do, unlike our competitors – we obviously have a number of different products and different focus areas.

“We are able to really establish that position as the specialist to consumers to assist them on their journey. So over 25 years, when we look back now, 25 years on, the proof is in what we’ve done, and we’ve really enabled home ownership for now more than 300,000 South African households across towns and cities in all the provinces.”

“We’ve lent in excess of R170 billion into that property market over that time.”

“It really is quite an amazing success story when you look back on it. There’s also another side to it worth a conversation on the funding side. That’s the consumer part, but there’s obviously a really interesting funding story as well, with quite a lot of innovation and disruption which came into the system with how we approach the markets.”

You are welcome to go ahead and give us some insight on that, the funding side … 

“I think on the funding side, as you well know, the banks fund themselves through deposits from individuals and from corporates, a lot of retail and wholesale deposits. That’s how they do home loan lending. As a non-bank, we clearly don’t have that luxury or that access to deposits. So we had to, right up front, come up with a more innovative way of doing it, and pioneered a funding model which bypassed those banks and looked to link borrowers directly into the South African capital markets.

“So that’s your pension funds, your savings funds, and trying to link those borrowers with a process known as securitisation.”

“Why it was quite pioneering then is that back in 2001, SA Home Loans brought the first residential mortgage-backed securitisation to the market. We called it Thekwini One, named after our home here in Durban, eThekwini.

“Thekwini One really was what I call the first issuance of scale to the market, which was a public issuance well supported by the capital market investors – that’s your pension funds, your collective investment schemes – and I think that funding model really was the underpin to our success, the support of those investors, the ability to raise that funding into a lending product which already does require quite a lot of funding if you’re going to be successful and compete with the banks.”

“And again, 25 years on, we are an active issuer in that market. We enjoy great support from the pension funds, the collective investment schemes, the capital market investors. We are, without doubt, I think, the biggest issuer in that securitisation market.

“We’ve raised, again, in excess of R90 billion from those funds, again doing their part, I guess, to link into the homeownership creation around the country.”

Just out of interest, Rob, you mentioned NBS. People with long memories will know that NBS [the Natal Building Society] was taken over by Nedbank. So it seems that it also sprouted a separate business that’s independent with SA Home Loans. Talking about Durban, is the group still based out of Durban, and will it ever look at listing? 

“Yes, we are still headquartered in Durban, so here in the north of Durban is our head office. It’s where a lot of our activity happens. We do have branches all around the country, as I said, but I think as a headquarter in Durban, in KZN, it really has served as well. So we’ve got a fairly unique position of being a head office in the financial service sector based in Durban.”

“It does mean we’ve become what I would call an ‘employer of choice’ here on the East Coast. We’ve got access to a really great base of skills and people here who want to live in Durban and who love the KZN lifestyle. We’ve been able to build really skilled teams across all the disciplines of our business.

“So the Durban head office has worked well for us, but the national brand is obviously equally important with great people in all our branches around the country.”

“Would we ever list? I think that probably was an early ambition of the business, back in the 2000s, to think about taking the business to listing. What we’ve probably realised is that would no longer be, I would say, the short-term ambition. We have a couple of big shareholders behind our business.”

Bank and pension fund backing 

“We’ve got a big bank in the form of Standard Bank through their private equity side, as well as the Government Employees Pension Fund as an investor consortium, as investors in our business.”

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“And in a business like ours, I think what we really benefit from is having shareholders and funders who are aligned with us and what we’re trying to do in the markets we serve. Government, for example, is a great focus area for us. Government employee borrowers are a strength for us in terms of servicing that market. So to have their pension fund sit behind us makes a lot of strategic sense. And with those aligned interests, I think we have the best impact on the market.”

“So listing I wouldn’t think is on the near-term horizon for us. I think our current structures serve as well.”

Turning to the property part of the interview now, SA Home Loans has also mentioned some expectations around trends in its latest release, and trends expected for 2024 and 2025. Can you share some insights as everybody is closely watching the interest rates and when they will come down?

“Interest rates are clearly front of mind for all of us. I’ve heard over the last few weeks you’ve spent quite a bit of time discussing interest-rate outlooks. The reason really is interest rates are the most sensitive factor to the property market.”

“So through the cycles we can always say the two things that drive activity in the housing market are going to be interest rates and where we are in the rate cycle, [and the] confidence of the consumer – so where they are confidence-wise to make what is always going to be the biggest financial decision in their lifetime, which is to buy a home.”

“So you need interest rates and confidence to be on your side. I think our property market over the last couple of years has not benefitted from that.”

“As you well know, interest rates have gone up extensively and we’ve obviously had challenges with things like load shedding, the cost-of-living impacts on consumers, and inflation rates. It’s almost been the perfect storm for property, where we’ve seen property transactions fall quite precipitously.”

Contraction in mortgage extension

“Last year, as an example, you saw in the housing market probably about a 25% contraction in mortgage extension, so a sizeable correction on the back of that stress that we’re seeing with the consumer. And the outlook, I would guess, again, will be linked to when interest rates come down.”

“We all look at our crystal balls. Forecasting economics is a dangerous game, given that there can be short-term shocks that change the outlook. But I think the consensus view remains that we are at the peak of the rate cycle. The next move is down.”

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“Our expectation probably would be the next move is down – around May or July is the likely outcome. That’s where most of the market sits. It probably would’ve been earlier if we’d been asked six months ago, but I think a lot of the challenges on the system continue with load shedding, inflation being a bit sticky, and particularly some of the global macroeconomic factors.”

“So you’ve got a lot of global factors at play out of our control, out of our MPC’s [Monetary Policy Committee] control, which ultimately will, I think, dictate when rates do come down. I think you can probably bet on it being by the third quarter is probably the safest answer.”

You mentioned that residential property transactions dropping by 25% in 2023. Which part of the market felt the most pain?

“I would say across almost all value segments, there was similar stress in terms of a decline in volumes. So it wasn’t like the lower and cheaper end of the market was more pressurised than the upper end. If anything, if you look at the data, the sort of luxury segment – the market above three- or four-million-rand house prices – in terms of value of mortgages last year probably held up the best, strangely enough, because there’s a lot of noise around some of those segments in the markets. But pretty equally stressed across the value segments.”

“If you start to look to the affordability of the consumer, that’s where the nuance comes in.”

“I think clearly in the middle- to lower-middle-income consumer, what the bankers would call your interest-rate sensitive markets, those with the smallest affordability surpluses when they’re taking out debt – clearly there we have seen probably more strain as you go down the income brackets, which then has manifested in a slowdown in activity in those segments of the market as well.”

And what about credit arrears in credit portfolios? Surely arrears could get worse before they get better as rate decreases, when they do come down, will take a little bit of time to flow through the market?

“Yes. We are at the peak of rates, we think. The important context is we haven’t had a rate increase now since May last year, so we are almost nine months away from when interest rates peaked. I think that’s why there is some reason for a little optimism that we are probably not far away from the peak in arrears and the peak in credit losses in the industry.”

“A nine-month lag clearly has allowed consumers time to catch up to what happened in interest rates to look to start to rehabilitate. Clearly, arrears are high across the industry – and that’s across home loans, across all consumer credit classes. We’ve seen, I think, all the banks now have come out with interims or updates to mention distressed borrowers in the retail segment … A perspective you’ll see across the banks as they come out with results is elevated arrears, elevated default levels.”

“My view is that we’re probably not far off the peak in defaults and arrears with the nine months we’ve had since the last rate increase.”

“And what you’ll start to see, once it peaks, is a slow recovery in arrear levels as the consumer has salary increases, and adjusts their living spend. And of course, as rates start to come down, that’ll accelerate that in the second half of the year.”

“So I do think we’ll see improvements in arrears over 2024 into 2025. That again goes hand-in-hand with the broader market; that would in itself spark confidence. That in itself sparks people starting to look at buying property again as affordability comes back into the system.”

Talking about confidence, I noticed almost an optimistic tone to your sentiments in that latest press release for 2024 and 2025 on residential property and the home loans front. Do you want to share some insights on that because we tend to get bogged down in South Africa? Yes, the elections are coming up in May, but there are 12 months in the year.

“Yes. I think we do in South Africa get quite near-term focused on all the negativity around and the bad news around load shedding and inflation and electioneering. So it is quite easy to get stuck in the moment of rates being high, affordability low, and arrears going up.”

“I guess we kind of step back and look at the perspective of rates now at the peak, so they won’t go up any more. The next direction is down.”

“We do think confidence is starting to improve generally for consumers. Inflation’s coming down. The cost of living is not quite as stressed as it was a year ago. When you start to add all those factors up, and we say with interest rates starting to come down slowly, with the consumer starting to be able to afford a bit more than they could a year ago, with confidence improving, with elections behind us come May – which obviously always causes volatility in the market – all those things add up to a slow and steady recovery this year, we think, in the second half.”

“We’re not talking a big bounce back, but slow, steady trends in the right direction. And then hopefully that’s accelerating as we head into 2025.”

“Beneath all our optimism is that housing and the need for housing and the dream of homeownership doesn’t go away with a down cycle in the economy. So as an asset class, it is a long-term need. Clearly, there’s a need for housing.”

“As South Africans, we have an embedded culture of homeownership, I think, if you put those [things] together, and you say as the economic fundamentals start to improve, South Africans by nature will go back to looking to buy property, buy that home, that in itself brings optimism for 2025.”

You can also listen to previous episodes of The Property Pod here.

William Murphy

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