The “sub-prime mortgage crisis” in America in
the period 2007 – 2010 was felt all around the world. Common wisdom tells us
this was caused by banks and other financial institutions giving loans to high
risk borrowers who could not repay the money. This message has been shared
around the world and all of us agree that people with poor credit records
should not be given loans as they cause a danger to all of us when they cannot
repay. The proverb seems to be “Poor people were reckless and stupid, and banks
got greedy.”
This is also the case in Namibia where the poor
(read previously disadvantaged), have found it harder to borrow and thus end up
renting property rather than getting an approved loan to purchase their
property.
But what if this “common wisdom” is wrong?
According to the National Bureau of Economic
Research (USA) the 2007 crash did not occur because people with low credit
borrowed to buy houses they could not afford. Rather it occurred because the
wealthy and middle-class were purchasing property and “flipping” them. (The
term flipping refers to buying a house or property with the intent to sell it
for a profit at later time, normally no more than two years. The most important
part of house-flipping is that your rental income will be enough to cover your
bond. So in effect the person renting is paying for the purchase price until
you sell the profit when you make a profit because house prices are going up.)
If this has been happening in Namibia,
especially Windhoek, I contend that with the reduction in inflation and
interest rate fluctuations (possible upwards next time round), combined with a
reduction in rental incomes, we will soon see defaulting in the home owners’
market.
So if you own a second home and use that rental
income to repay some of your loans, BE AWARE the market is experiencing
difficulties and it will impact on you when you no longer are getting the
expected rental income and its (previously) usual increase of 10%
