Like the property market to which it is directly linked, the mortgage lending market remains a very comfortable place to be, with significantly elevated levels of lending compared with the lows of 2009, and sharply lower bad debt levels since those days.
However, with interest rates moving in a “sideways-to-higher” direction, a stagnant looking economy as 2015 gets under way, and no further meaningful improvement in mortgage loan affordability on the residential side, it is perhaps not surprising that further growth in new residential mortgage lending had been slowing as 2014 drew to a close.
• SARS transfer duty revenue data has been pointing to slowing growth in the property market in recent times, and SARB 4th Quarter data regarding mortgage loans granted appears to confirm the slowing growth trend.
• Growth in new mortgage loans granted (residential and commercial included) has tapered from a year-on-year peak of 58.5% in February 2014 to 18.7% as at December 2014, and both Commercial and Residential Mortgages have contributed to this broad slowdown in growth.
• The slowing mortgage lending growth is hardly surprising, given that interest rates are on a “sideways-to-higher” trajectory, and economic growth in 2014 slowed for the 3rd consecutive year to a snails pace of 1.5%. This economic environment doesn’t appear conducive to strong mortgage lending growth rates following the “upward normalization” of lending levels since the lows of the 2008/9 recession.
• Despite weak economic fundamentals underpinning growth in new mortgage lending, the Big 4 banks’ bad debt ratios continued to improve in 2014, with the start of the declining trend in these ratios dating back to2010. We believe that the “cleaning up” of their bad debts has gradually encouraged the banks to take slightly more risk in the area of residential mortgage lending.
• A mildly higher risk appetite by banks as a group appears to be visible in mortgage originator Ooba’s data, which continues to show a rising trend in banks’ “effective residential mortgage approval rates”, a broad upward trend that started back in 2010.
• In addition, Ooba data hints at banks starting to be more competitive on pricing of home loans in recent months, with the average differential above prime rate on new home loans having declined mildly.
• But despite an apparent increase in banks’ “lending appetite”, once again slowing growth the FNB Estate Agent Residential Activity Rating, and a SARB Leading Business Cycle Indicator stuck in negative territory, suggest that we should not expect any strong resurgence in new residential mortgage lending in the near term.