Mortgage Barometer – Mortgage Bond LTP Ratio Trends

An uptick in the still-small percentage of 105-109% LTP bonds is “interesting”, and “100% and above” LTP loans form a significant 42.9% of total bonds, but mortgage lenders’ as a group remain conservative on LTPs compared to the days of the pre-2008 boom.

In order to view trends in residential mortgage lenders’ levels of risk taking, FNB periodically analyzes trends in the Loan-to-Purchase Price (LTP) Ratios on bonds registered by individuals (“Natural Persons).

Using Deeds data for transactions undertaken by individuals (“Natural Persons”), FNB have estimated the Loan-to-Purchase Price (LTP) Ratio for each transaction identified, and then calculated the Average LTP Ratio for the entire market.

In the final quarter of 2016, the Average LTP Ratio rose slightly from 87.9% in the previous quarter to 88.5%. However, after one quarter of increase, one cannot draw any conclusions with regard to a rising trend in LTPs. Rather, the broad trend in Average LTP has been downward since a 90.1% multi-year high reached in the 2nd quarter of 2012.

Therefore, the 88.5% Average LTP remains down on the post-2008/9 recession high of 2012, and still well down on last decade’s boom time high of 96.6%, reached back in the 4th quarter of 2007.
FNB then breaks the data down, placing each loan within an LTP Band, then estimating the number of loans in each LTP band and their percentage of the total number of loans.

FNB finds that the 100%-104% LTP Band, i.e. those homes where the bond registered is from 100% to 104% of the home transaction value, were estimated at 38.2% of the total number of bonds identified in the 4th quarter of 2016. Most of these would be 100% exactly, but a minority do venture above 100%. FNB has seen a resumption in increase in this percentage in the past 2 quarters, from 37.6% in the 2nd quarter of last year, but the percentage remains lower than the 40.1% multi-year high reached at the end of 2015.

What is more noticeable, however, is an upward move in the 105%-109% LTP group of bonds. While this group of LTPs is still a small one, making up only 4.7% of the total, this percentage has risen noticeably from 2.9% of total bonds registered at the beginning of 2016.

It would seem, therefore, that there may be a move towards a greater portion of bonds being registered at LTPs above 100% and even above 105%, although this grouping remains a small share of the total.

To give some perspective with regards to the level of mortgage lender “aggression”, the percentages for LTP Ratio loans “100% and above” was 42.9% of total mortgage loans in the final quarter of 2016. This remains far lower than the 65% reached in the 2nd quarter of 2007 at the back end of last decade’s property “bubble”. The percentages of “100% and above” loans thus remains modest by comparison to then.

One also needs to understand that bond registration volumes remain moderate these days compared to the pre-2008 boom times. Whereas we identified 9,593 100% to 104% LTP ratio bonds in the 3rd quarter of 2016 (4th quarter volume data incomplete), the total number was a far higher 27,113 as at the 2nd quarter of 2006.

Similarly with the 105% to 109% LTP category, whereas FNB identified 1,056 bonds in this band in the 3rd quarter of 2006, at the 2nd quarter of 2006 there were 7,145 such loans.

100% and above LTP lending this remains far less prominent today compared with the pre-2008 boom years, although such LTP loans are fairly common in today’s market.

Interesting will be to see whether this LTP band rises in prominence in the near term. It is possible that the mortgage lending sector may “push some boundaries within reason” in response to a lack of “natural” market volume growth of late.

Which house price ranges are most heavily dependent on “100% and above” LTP loans? FNB have split the market into Quintiles based on the value of transactions by individuals. The top 20% of transactions by value are labeled “Quintile 1”, while the bottom 20% of transactions by value are labeled “Quintile 5”, the others falling into the quintiles in between.

The average transaction values, as at the 4th quarter of 2016, per quintile were R2.465 million in the case of Quintile 1, R1.075 million in Quintile 2, R664,093 in Quintile 3, R362,873 in Quintile 4 and R108,498 in Quintile 5.

Examining the distribution of Loan-to-Purchase Price Ratios (LTP) by price quintiles, FNB finds that Quintile 4 is most highly dependent on “100% and more” loans. Its share of 100%-104% loans is 53.23% of its total loans, which is slightly lower than Quintile 5’s 55.2%. However, Quintile 4 has 9.05% of its loans in the 105-109% LTP bucket (bringing its 100% and more total to 62.28% of its total loans registered in the 4th quarter of 2016. By comparison, Quintile 5 has a lower 1.36% of its loans registered in the 105-109% bucket (bringing its total 100% and higher LTP loans to 56.56% of its total loans registered in the 4th quarter.

At the other end of the spectrum, Quintile 1, the wealthiest/highest price quintile has a significantly lower average LTP level, with a mere 23.1% of its loans in the 100-104% LTP range, and 1.8% in the 105-109% LTP range.

Lower income/price quintiles thus have the higher dependence on high LTP ratio bonds.

It makes sense, too, that on an age basis one finds a higher dependence on higher LTPs in the more financially-constrained younger generations of home buyers.

FNB estimates that the Average LTP ratios in the 18-25 and 25-30 year age groups are the highest of the age cohorts, at 92.4% and 92.8% respectively on all bonded transactions. The average then slides steadily, to 91.2% LTP in the 30-35 age group, 89.2% in the 35-40 year group, and ending at 74.9% LTP for the 55+ age group.

Finally, what are the average bond values of the different age cohorts? Given their financial limitations early in their careers, it is not surprising to find that the lowest average estimated bond value in the 18-25 year age group, at R680,293, and the 25-30 age group at R828,530. The average bond value makes its way higher to peak at R1.103 million for the 40-45 year age group before tapering off in the older age groups.

In short, according to our Deeds data estimates, “100% and above” LTP mortgage loans are the most common of any of loans in any of our major LTP bands these days. Late in 2016, FNB saw a slight increase in the average LTP, as well as a noticeable increase in that portion of bonds with LTPs in the very high 105-109% range. However, the average LTP on all bonds remains moderate by pre-2008 boom time standards, as does the level of “100% and above loans” pointing to still-moderate risk taking by mortgage lenders as a group. This is probably the desirable stance to maintain, given a virtually “zero-growth” economy which presents significant levels of macro risk.

Read more here: Mortgage Barometer LTP Distribution – February 2017