Real Estate is funded by borrowed money. Many hopeful home owners are helped to realize their dreams by mortgage companies. The growth of the Real Estate Industry is dependent on funding. Zimbabwe’s real estate growth has been weak due to liquidity challenges. Housing shortage has reached alarming rates of 1-1.5 million meaning that half of the families of this nation do not own a house assuming 5 people per family. This means that all these people are first time buyers. What hope is there for the first time buyers in a market with very high interest rates and 25% deposit for mortgages?
By Mike Mafemba
Mortgages available in the market range from 11% to 16%pa fixed rate. There are no variable rates available. A deposit of 25% is required among other usual requirements for a mortgage. Here are the challenges to a first time buyer that the interest rate and deposit pose:
- Assuming one wants to purchase a property in a high density area in Harare costing $40,000, a deposit of $10,000 is required. You will therefore borrow $30,000. At 15%pa interest rate, monthly mortgage repayment s would be $419.88 for 15 years, Interest Paid $45,577.70 and Total repayment $75,577.70
- Every home owner expects the value of their house to increase as time goes by. An increase of 5-8% per annum is not too much to ask in a normal market. This increase in value is called equity i.e. the positive difference between what you owe the mortgage company and the market value of the property. If the market value is less than what you owe the mortgage company then you have a negative equity. Should you decide to sell the house under these circumstances you will have to find the difference i.e. negative equity and pay the mortgage company in order to square up your mortgage balance.
- In the current economic environment house prices are not going up but going down. This means you will end up with a negative equity and all you do is work for the bank instead. Banks will make money at your expense. For one to create equity it means your house must go up in value by 20-28%pa so that the bank takes 15% and you remain with 5-8%. With current market values going down due to liquidity crisis which has gripped the nation negative equity is unavoidable for ordinary home owners. Using the above example your property value after 15 years at 8%pa increase in value it would be worth $68,806.95. On the other hand you will have paid $85,577.70 (your total mortgage repayment plus deposit) leaving you with a negative equity of $16,770.75. So effectively you work for 15 years to give the bank $16,770.
Possible solutions to counter negative equity
- Hold on to your property for the long term and hope that the economy will turn around. At that point property values will shoot because demand will increase and interest will drop significantly. The tables will turn and your property value will rise much faster than interest rates.
- If the market misbehaves and the bond notes lose value, pay off your mortgage quickly and secure your property future value
- Buy a low cost property in a good location on mortgage and flip it within 3-6 months. You will effectively pay an interest of about 7%pa yet it is possible to make 25% profit on the deal. The success of this however depends on a number of factors e.g. your experience in flipping houses, your understanding of the market, ability to make mortgage payments during construction/renovation period etc.
The current market conditions are not good for first time buyers as it is very difficult to raise the 25% deposit and pay an interest of 11%-16% pa which is a rip off. Banks are making profits at the expense of their customers. As much as the cost of borrowing for banks is high due to country risk, the customer is the one sweating for the bank. The market is good for cash buyers who can buy and hold to create massive equity as soon as the economy turns around. A market boom will see current property owners making fortunes as they take advantage of the current depressed market. Now is the time to invest in real estate in Zimbabwe. There is hope for the future.
Mike Mafemba can be contacted on: firstname.lastname@example.org