Property Mortgage Market Update - September 2008

Plummeting New Mortgage Loans reflect the weak state of the residential property market, but are helping to stabilise the household debt situation.

The South African Reserve Bank Quarterly Bulletin was released yesterday, and confirmed the weak state of the residential mortgage market. Total new mortgage loans and re-advances granted on residential property in the second quarter fell by -31.5% year-on-year.

The new residential mortgage number is a reflection of just how sharp the activity decline in this market has been in recent times, something that is not always apparent if one casts a glance at the more moderate pace of slowdown of the average house price indices.

The list of negative forces impacting on residential property, and thus mortgage demand is well known. It includes rising inflation eating into disposable income, a rising household debt-to-disposable income ratio which along with rising interest rates has raised the debt service ratio, and a slowing economic growth situation which has started to hamper job creation and middle class income growth.

However, while reflective of the pain experienced by residential market players currently, the prominent share of housing mortgage advances in overall household debt means that their rapid slowdown has assisted in bringing about a turn in the household debt-to-disposable income ratio, which is the first step to ultimately reducing the household debt-service ratio and thereby the bad debt. In the second quarter, the household debt-to-disposable income ratio measured 76.7%, down from 78.2% in the previous quarter.

Growth in outstanding household debt has been slowing since late-2006, and on a quarter-on-quarter basis is now growing slower than nominal disposable income leading to the decline in the debt-to-disposable income ratio. Although this decline is an important step to alleviating household sector stress, as at the second quarter the relief for the house-hold sector was not yet a reality, as further interest rate hikes in April and June saw to it that the debt-service ratio (the cost of servicing the household debt burden as a percentage of household sector disposable income)continued to rise from 11.4% in the 1^st quarter to 11.7% in the 2^nd.

The stable interest rates of the current quarter, coupled with further expected decline in the debt-to-disposable income ratio should see to it that little further rise in the debt-service ratio takes place, and by the final quarter of the year, the expectation of no further rate hiking should see to it that this important ratio begins to decline.

Such a decline would be the first step towards an improving bad debt situation, which could be expected at a stage of 2009 given the normal leads and lags, and all of this is an important building block for a residential market recovery.

At least 2 more quarters of decline are anticipated in the value of new mortgage loans on a quarter-on-quarter basis, including the current quarter, while year-on-year growth is expected to remain in negative territory until mid-2009 (see graph below).

For the current year, the total value of new mortgage loans is projected to fall by about 30%, implying that from last year’s total value of R364.6bn, new mortgage loans are projected at R256bn for the current year, followed by another more mild rate of decline to R230.4bn for 2009. However, on a quarter by quarter basis, growth is expected to improve steadily as 2009 progresses, driven by an expected return to interest rate cutting as from April, while the combination of lower interest rates and a gradual global economic recovery are expected to have a positive impact on local quarterly economic growth and household purchasing power later next year.

In terms of the overall household debt situation, it is believed that the debt-to-disposable income ratio has just commenced a downward trend, while our belief that interest rates may have peaked leads to the expectation that by the final quarter of this year we should start to see a decline in the debt-service ratio, a precursor for a lagged improvement in the household bad debt situation in 2009.

The risks to forecasts remain, though, and much depends on the continued “good behaviour” of global oil prices and food price inflation, so as not to drive CPIX inflation too much higher, as such events could trigger further domestic interest rate hikes.