Mortgage Barometer: Residential Mortgage Market Financial Stress in 2016

During 2016, as the multi-year economic growth stagnation has proceeded further, there appears to have been some heightened concern over the level of financial stress in the Residential Mortgage Market.

Such concerns are not altogether without justification, given gradual interest rate hiking since early-2014, and an economic growth stagnation since around 2012. But some perceptions of the financial stress situation of late may have been worse than the actual reality.

Indicators of Residential Market Financial Stress

2016 looks set to go down as a year in which financial stress in the Residential Market did indeed rise, compared with 2015, but the rise looks to have been mild at worst.

Late in 2015, the FNB Estate Agent Survey began to show a mild increase in the percentage of home sellers believed to selling in order to downscale due to financial pressure. From a low of 11% of total sellers in the 3rd quarter of 2015, this percentage rose to 14% in the final quarter, and again measured 14% in the 2nd quarter of 2016.

However, that upward move appeared short-lived, as the 3rd quarter 2016 survey saw the estimate receding to 12%.

To provide perspective, the 2016 to date estimate for sellers selling in order to downscale homes due to financial pressure is 13%, only marginally up from a 12.5% average for 2015. These percentages may appear high to some, but there is always a fair amount of pro-active financial pressure-related down scaling it appears, and these recent estimates are very low when compared to the 34% high reached in the 2nd quarter of 2009 during the “Financial Crisis”.

Something similar has happened in the rental market, according to TPN data. TPN compiles data regarding the percentage of rental tenants that are “in good standing” with their landlords. Through 2015 and early in 2016, this percentage began to decline mildly, pointing to rising financial pressure among the tenant population. From a multi-year high of 86% in the 3rd quarter of 2014, this percentage declined to 82.2% in the 1st quarter of 2016, the drop from 85% in the final quarter of 2015 to 82.2% in the 1st quarter of this year being particularly noticeable. It appeared as if the financial stress situation was about to gather momentum after 2 years of interest rate hiking and a longer period of economic growth stagnation.

But the deterioration was short-lived, as the 2nd quarter estimate for tenants in good standing rebounded to 85.1%.

At 83.6%, the year-to-date average for tenants in good standing is weaker that the 84.5% average for 2015. But this percentage still reflects a relatively solid tenant financial situation compared to the dip to a lowly 71% early in 2009, back around the time of the Financial Crisis.

Banks’ actual Household Sector Mortgage Arrears figures have shown similar behavior. From 8.2% of the total value of accounts, the value of household mortgage arrears jumped quite suddenly to 9.3% of the total value of accounts in the 1st quarter of 2016, according to NCR (National Credit Regulator) data. Thereafter, in the 2nd quarter data, however, there was only a slight further rise to 9.4%, while this percentage measured in terms of number of arrears accounts, as opposed to value, actually even declined very slightly in the 2nd quarter, from 9.73% previous to 9.69%.

The average year-to-date value of arrears as a percentage of the total value of mortgage accounts is 9.3%, up from 8.5% average for 2015. But even the recently elevated level remains far down on the 16% high of early-2009.

Why such a mild bad debt cycle to date?

So what’s going on here? There are dismal economic performance indicators, in a virtually zero growth economy, and have had 200 basis points’ worth of interest rate hikes to date. Consumer Confidence is very weak, and the depreciation of the Rand in recent years has been severe as investor confidence deteriorates too.

And yet, despite all of this, the financial stress situation in the Residential Market appears fairly benign.

The answer lies firstly in the fact that the SARB (Reserve Bank) has only raised interest rates by 2 percentage points in total since early-2014. At 10.5% Prime Rate, interest rates are still relatively low by South African standards. If the consumer wasn’t able to cope reasonably well with such a mild rate hiking cycle to date we would be in serious trouble.

But it goes further. Perhaps, most importantly, has been the very slow pace of the economic “puncture”. The SARB’s gradual approach to rate hiking, the most gradual rate hiking cycle in memory, has been key here. It has allowed economic growth to gradually fade away as opposed to the short sharp recession of 2008/9.

In addition, this gradual approach has given households a long period of time to adjust their spending and borrowing patterns to rising interest rates and slowing disposable income growth. This, FNB belieces, has prevented much of the potential financial stress.

The interest rate hiking has sent the right signals to households, i.e. curb the borrowing growth, but at the same time given a lot of time for households to take action.

And so, the Household Sector Debt-to-Disposable Income Ratio continued to decline into 2016, having fallen all the way from an all-time high of 87.8% in the 1st quarter of 2008 to 75.1% by the 2nd quarter of 2016. This level remains high, but is on the right path lower. This decline in the debt ratio has helped to lower household vulnerability to rate hiking considerably since 2008, a key contributor to relatively low levels of financial stress to date.

The Mortgage Debt-to-Disposable Income Ratio has declined even more significantly over the same period from a 49.2% high early in 2008 to 34.7% by the 2nd quarter of 2016, with mortgage lenders having lent far more cautiously since the end of the pre-2008 boom.

This debunks perhaps another myth, i.e. that household indebtedness is getting worse. For some, maybe, but this is not so for the Household Sector as a whole, and doesn’t appear to have been the case in the Residential Mortgage Market. Overall indebtedness remains high in our view, but has improved (declined) noticeably since 2008.

And it would appear that these 2 indebtedness ratios are set to decline further, as the Household Sector adjusts to the mounting risks of greater pressure on their finances as the economy stagnates.

For a long time, FNB’s Estate Agent Survey has been pointing to declining Residential Market Activity. With the customary lag, new mortgage loan demand has also begun to decline. In the 2nd quarter NCR data, the value of new Household Sector Mortgage Loans Granted declined by -1.17% year-on-year, the 1st quarter of decline since the final quarter of 2012, following on a gradual slowing in growth rates in prior quarters. This was entirely expected, and more decline should be anticipated.

But it goes further, and within the housing market FNB sees a shift in what is being bought as well. Households are becoming more conservative on average, and non-essential buying is becoming less of a priority. This is perhaps best witnessed in the estimated percentage of sellers selling their homes in order to upgrade to a better and often more expensive one. From a high of 20% at the end of 2013, this percentage has declined all the way to 11% by the 3rd quarter of 2016.

FNB has seen similar moves in other markets such as the vehicle market, where new vehicle sales have plummeted as many have put their planned vehicle replacement or upgrade on hold. Of more concern, though, is that a portion of households appear to be cutting back on the level of home maintenance, according to our agent surveys. It’s one thing to halt the value adding upgrades to homes, but it is more troublesome for home owner and mortgage lender alike when full maintenance is not done, possibly contributing to depreciation in the value of the asset that is used as security for a mortgage loan.


The set of financial stress-related indicators related to the Housing Market did deteriorate mildly around late-2015/early-2016, but thereafter the deterioration appeared to stall. This may be as a result of no further interest rate hikes after 2 quick rate hikes during the 1st quarter of 2016.

There have been some perceptions in recent times that financial stress in the housing market has become troublesome. Certainly it appears to have become mildly worse in 2016 on average compared to 2015, but our various indicators of stress actually still point to a very good situation by historic standards.

This is not to say that South Africa should not be concerned. If the economy continues its multi-year stagnation, there exists the real possibility of future employment and income loss on a significantly larger scale, and this can impact greatly on households’ ability to service debt.

Many households are in touch with economic and policy reality in South Africa, though, as reflected in recently very weak Consumer Confidence numbers. Many have thus been gradually adjusting their spending and borrowing patterns, as reflected in a decline in home upgrades and in the overall level of indebtedness.

Most important, though, is that the SARB has played a key role in terms of allowing ample time for such adjustments, by moving at no more than a snails’ pace on interest rate hiking to date. This represents a major change from the more “rapid fire” approaches of rate hiking cycles gone by.

Read more here: Property_Barometer_Housing_Market_Stress_2016.pdf