The South Africa Reserve Bank (SARB) Leading Indicator has recently started to edge higher, a reflection of some recent global economic growth improvements which can contribute, along with domestic drought alleviation, to mildly higher economic growth this year. However, it may be some time before this translates into positive growth in new residential mortgage lending, after the sector neared the end of 2016 still in decline.
Using Deeds data for property transactions registered by individuals (“natural persons”) under R10m in value, which FNB believes to be overwhelmingly residential transactions, FNB estimates the trends in total transactions as well as split between bonded transactions and un-bonded (“cash”) transactions.
The total volume of these property transfers registered declined by -4.8% year-on-year for the 3 months to October 2016 (FNB uses a 3-month moving average for smoothing purposes). Of the cash and bonded sub-categories, bonded transactions were the “weak link”, declining year-on-year by a more significant -8.4%.
In transaction value terms, too, there has been a broad growth slowdown in recent years, since a growth high point reached in 2013 to be more precise.
From 16.8% year-on-year growth for the 3 months to September 2013, growth in the value of total transfers by individuals had slowed to 2.1% for the 3 months to October 2016.
The bonded transaction sub-category was in year-on-year decline for the 3 months to October 2016, to the tune of -5.5%.
While deeds data volumes for November and December probably remain incomplete, FNB can use the existing sample to gain insight as to mortgage market strength through looking at the growth rate in the average bonded transaction value.
From this, it would seem unlikely that there was any noticeable turn “for the better” by the end of 2016, with the year-on-year growth rate in the average bonded transaction value having slowed further from 3.2% as at October to a negative -0.1% by December 2016.
None of this comes as a surprise, given the economic environment. Real economic growth slowed from 2012 to near zero in 2016, while interest rates had risen mildly from 2014 to early-2016, and FNB Consumer Confidence Index readings continued to be very weak through last year.
Looking forward, however, there may be some early signs that some mild turnaround is approaching. This comes in the form of a SARB Leading Business Cycle Indicator that has been slowly turning to positive growth after a few recent years in negative territory.
The Leading Indicator can often be a good indicator of near term economic growth trends to come, and can also be a useful leading indicator of new residential mortgage lending growth.
In the 3rd quarter of 2016, the Leading Indicator turned to slightly positive year-on-year growth of +0.4%, after being consistently in decline since the end of 2013, and on a monthly basis the positive growth strengthened further in October and November.
The Leading Indicator broadly tracks the growth direction of the FNB Estate Agent Activity rating, normally lagging it mildly but this time around seemingly leading the growth direction of the Activity Rating.
The question, however, is how quickly can economic improvement ultimately translate into improving growth in new residential mortgage lending? To attempt an answer to this, FNB compares the peaks and troughs in growth in the smoothed FNB Residential Market Activity Rating.
“Activity”, for estate agents, is about a variety of factors, from inquiries to buy or to list, from actual listing activity to the number of feet through doors at show houses. With a considerable lag, a portion of such activity turns into actual transactions.
The Activity Rating was still very much in year-on-year decline as at the final quarter of 2016, to the tune of -7.4%. However, this rate of decline may have bottomed out in the prior quarter at -8.1% year-on-year, if the SARB Leading Indicator is anything to go by.
If the 3rd quarter of 2016 actually proves to have been the bottom point in the rate of activity decline, how long before one gets a corresponding turn in actual new mortgage lending?
As at the 3rd quarter of 2016, the value of new Household Sector mortgage credit granted (Using NCR data) declined by -7.14%, having seen its growth on a slowing trend since a +9.3% year-on-year growth high point reached in the final quarter of 2015.
Analyzing prior bottom turning points in the year-on-year rate of decline in the Activity Rating, versus that of New Credit Granted, points to the bottom point in the rate of decline in new credit granted lagging that of the Activity rating by as much as 4 to 6 quarters.
Should this apparent “lagged” relationship continue to hold up, and assuming the 3rd quarter of 2016 represents the bottom turning point in the rate of Activity decline, it would suggest that we would only start to see some turn for the better in the rate of year-on-year decline in new mortgage lending somewhere in the second half of 2017.
Such a late-2017 turn may be too late to prevent 2017 from being a weaker year, from a new mortgage lending point of view, than 2016 overall.
Read more here: Mortgage Barometer Transaction Volumes – 8th of February 2017