Lack of faith in ABSA house price index

ABSA appears to be restricting the access of equity in home loan accounts that were specifically sold with this feature in mind.  Moneyweb’s article on the real estate shocker has already totally nearly 70 comments.

What this says about ABSA’s house price index

What’s interesting is that ABSA’s house price index has remained positive throughout the interest rate increases, decreased consumer confidence, massively decreased property market activity and general feelings of gloom around the local property market.  Steadily increasing prices sharply reduce the risk of borrowers accessing the equity in their home loans up to the original agreed loan amount.

For most borrowers, their property would have had several years of price increases (on average) since the loan amount was granted. ABSA’s reluctance in this regard seems to suggest that they aren’t confident in their own property price index.

The second sentence of their announcement [hosted by moneyweb while I look for original] is:

Absa took the decision to amend the facility due to the decline in property values over the past six months

Decrease? ABSA still has property prices increasing!

Hints of the real reasons?

Another sentence:

This is also due to the substantial increase in the cost of holding capital to support all unutilised facilities

Tough times for all financial institutions. I can imagine tense meetings where managers of different divisions are instructed to find ways to reduce capital requirements. This is a tangible sign of the impact of the financial crisis on our banks and the tightening of pressures on the real economy.

Variation in property returns around the mean

It is true that individual properties could experience significantly different price appreciation or depreciation compared with the overall average. However, those with significant equity in their home loans are:

  • Those who have been paying off the capital for several years, and would thus have been exposed to several years of positive house price appreciation. It seems unlikely that fluctuations in this groups property returns will put their current house price less than the original loan amount. Unless of course ABSA granted home loans  irresponsibly in the past, offering 100% or greater loans on overvalued properties. It seems unfair to change their approach on their FlexiReserve Comprehensive loan product now.
  • Those who have made additional payments into their home loans over and above the required minimum payment. These borrowers only have equity in their home loans because they paid more than they were required to pay. Usually, this was one of the reasons they used this product – they were doing the financially prudent thing by paying off their debt as quickly as possible and maximising the effective return they could earn on their cash. These borrowers may end up worse off than if they had simply made the minimum payment required in the first place!

A primary sentence from their marketing material on the loan product (taken as at 15/10/2008):

Access equity in your home loan and withdraw from it whenever you need additional funds.

That sounds surprisingly like what many borrowers have done. It continues:

You have immediate access to available funds via the Internet, Telephone Banking, ATMs or any Absa branch, provided you have an Absa transactional account

Interesting, eh?

An element of truth

ABSA’s announcement makes a big deal about this being for the protection of borrowers and ABSA. There is truth to this. Borrowing against equity that “doesn’t exist” is not a good idea. In fact, in these unstable financial times, one should be trying to pay down debt as quickly as possible, not add to it.

This doesn’t change that many individuals and families would have stashed their special-event savings into the high-yielding comfort and safety of their home loan. Now is also a time when some may need those savings. I don’t think it’s up to ABSA to unilaterally decide to change the rules of the game.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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