Research

June Mortgage Credit growth slows, the new lending growth environment remains soft

June growth in Outstanding Household Sector Mortgage Credit slowed slightly, from 4.32% year-on-year in May to 4.14%. This is a continuation of the recent slowing growth trend that started after a multi-year high of 4.9% year-on-year as at January 2016.

In real terms, adjusting for CPI (Consumer Price Index) inflation, this translates into further decline in the value of mortgage loans outstanding to the tune of -2% year-on-year.

This means that, since January 2009, the real value of Household Sector mortgage loans outstanding has declined by -17.3% to June 2016, an important part of the market correction following the residential mortgage market “overshoot” in the pre-2008 boom period.

Given virtually no economic growth in recent times, along with some of the lagged impact of recent rises in interest rates still to impact on new mortgage demand, FNB would anticipate further slowing in Household Sector mortgage credit growth in the near term.

Overall Household Sector Credit growth is a bit more difficult to gauge currently, given a “structural break” in the data from April 2016 onward after some data adjustments. However, since those adjustments, year-on-year growth on Total Household Sector Credit has slowed 2.3% year-on-year in April to 2.1% in June, suggesting that growth remains muted. Prior to the data adjustments, Household Sector Credit growth was growing at a rate just below 5% year-on-year.

MORTGAGE-TO-NON-MORTGAGE SHARES OF TOTAL CREDIT

The years of slow growth in Household Sector Mortgage Credit since the end of the pre-2008 Boom appear to have largely “normalized” its share of total Household Credit, if we consider pre-boom levels to be “normal.

Whereas Mortgage Credit’s share of total Household Credit rose from 62.4% early in 2001 to 70.2% by 2009, this percentage has since dropped back significantly to 59.9% by June 2016. The slight increase in the mortgage share from April 2016 was largely due to data adjustments.

HOUSEHOLD CREDIT GROWTH STILL SUFFICIENTLY SLOW AS TO KEEP INDEBTEDNESS RATIOS DECLINING

The moderate mortgage lending environment remains a big plus for improvements (decline) in overall Household Sector indebtedness.

FNB believes that it is crucial that Household Sector Credit growth remains pedestrian in order to further lower the still-high Debt-to-Disposable Income Ratio, because in a weak economic environment where the risk of recession is high; strength in Household Disposable Income growth in the near term cannot be expected.

Moderate mortgage advances growth since the end of the 2000-2007 Residential Boom/Bubble has been key to the declining trend in the Household Debt-to-Disposable Income Ratio to date, due to the sheer size of the Mortgage Credit category. From a high of 87.8% in the 1st quarter of 2008, the Household Debt-to-Disposable Income Ratio has declined noticeably to 76.6% by the 1st quarter of 2016. This declining trend in the ratio has been greatly assisted by a drop in the Household Sector Mortgage Debt-to-Disposable Income Ratio from a 49.2% peak to 35.1% over the same period.

Going forward, stagnant economic growth looks likely to keep income growth very slow, in turn requiring very slow household credit growth so as not to increase Household Sector vulnerability. The fact that the most recent Mortgage and Household Sector credit growth figures remain slow is thus seen as a positive.

OUTLOOK

The mild slowing in June in both Household Mortgage Credit and overall Household Sector Credit growth is not at all surprising in the current weak economic environment, and given further interest rate hiking early in 2016.

Consumer Confidence remains very weak, the Household Sector has shown various signs of increased conservatism in certain areas of spending, and this should be key in terms of containing borrowing growth.

Such a slowdown in credit growth remain desirable from a point of view of containing households’ financial vulnerability, given that disposable income growth is likely to be sluggish in the foreseeable future.

With regard to the Mortgage Credit component, Deeds data has shown a broad slowing growth trend in the value of new bonded registrations, which should lead to the ongoing containment of outstanding mortgage loans growth.

The FNB Estate Agent Survey Residential Activity rating has shown 5 consecutive quarters of year-on-year decline, while the SARB Leading Indicator has been in year-on-year decline for almost 3 years. These indicators normally lead new mortgage lending trends.

FNB thus believes that further slowing in new mortgage lending growth is due. This in turn should lead to growth in mortgage credit outstanding to continue slowing in the near term, helping total household credit growth to lower levels. This is very important in sustaining the healthy declining trend in the Household Debt-to-Disposable Income Ratio, and we expect such further decline to take place.

Read more here: FNB Mortgage_Market_Barometer__Jul_2016