Late in 2016, bonded home transactions were in a state of decline, both in terms of volume and value, according to our estimates taken from Deeds data. Other data, such as the Value of New Residential Mortgage Loans Granted, as published by the NCR and the SARB, also pointed to a year-on-year rate of decline. This was to be expected, given the rise in interest rates from early-2014 to early-2016, and given a multi-year economic growth slide all the way to a mere 0.3% by 2016.
2017 doesn’t promise huge excitement in the Residential Mortgage Market, but we do pencil in a possible return to mild positive growth in bonded home transactions as certain leading economic indicators turn for the better.
The residential mortgage market ended 2016 on a stagnating note
As 2016 drew to a close, available data pointed to a still-stagnating Residential Mortgage Market.
Viewing Deeds Office data of all bonded property transfers registered by individuals (“Natural Persons”), which are residential-dominated, FNB saw year-on-year declines in both total value and volume of these transactions for much of 2016. Using a 3-month moving average for smoothing purposes, FNB saw a -9.3% year-on-year decline in the volume of such transfers for the 3 months to November 2016. The value of these bonded transfers declined by -5.3% year-on-year for the same period.
The market weakness has also been visible in the growth rate in the average value of bonded transfers by individuals, which has turned negative to the tune of -0.5% year-on-year for the 3 months to January 2017. This represents a slowing growth rate from a significantly stronger 6.5% as September 2016.
The broad softening in the mortgage market growth, since around 2014, has been caused by an affordability deterioration in mortgage loans. Interest rate hikes have been one obvious cause of this, rising by 2 percentage points from early-2014 to early-2016, while Household Disposable Income growth has also been battling at the hands of economic weakness and rising effective income tax rates.
Growth in mortgage loans outstanding has recently slowed, as new lending declines
The result of slowing growth and more recent decline in new lending value has been a recent slowing in year-on-year growth in outstanding Mortgage Advances to Households, from a post-2008/9 recession high of 4.7% in February 2016 to 3% by January 2017. This translates into a continuation of the multi-year decline in real terms (adjusted for CPI inflation), which has lasted since 2011
But leading economic indicators point to a gradual return to positive new mortgage lending growth
However, into 2017, although no fireworks are expected, the time may be ripe to expect at least a near term end to the decline in new mortgage market transaction activity. Driving such an expectation of a return to some renewed positive residential mortgage lending growth are some key leading business cycle indicators which point to improving economic growth in the near term.
Both the OECD and SARB Leading Business Cycle Indicators have recently started to point to strengthening, the SARB Leading Indicator moving into positive year-on-year growth territory after a multi-year decline, while the OECD version has seen its year-on-year rate of decline diminishing steadily. Global economic improvement, and some rise in South Africa’s key export commodity prices, has helped, while locally we have the alleviation of drought conditions for much of the country set to play a role.
The result is that FNB expects some real economic growth improvement in 2017, from last year’s 0.3% to 1.1%.
In addition, under the assumption of a reasonably well-behaved Rand, and a food price inflation rate slowing significantly as Agriculture Prices decline in response to alleviation of drought conditions, we expect no further interest rate hiking this year.
The Leading Business Cycle Indicators often act as good leading indicators of near term new mortgage lending direction. The fact that both Leading Indicators have begun to move higher thus can suggest that new mortgage lending will follow suit with something of a lag.
Already, a lack of further interest rate hiking since March 2016, along with very weak house price inflation and thus average bonded property transaction inflation, has led to a significant slowing in bond affordability deterioration in recent months.
This is reflected in a slowing in the year-on-year growth rate of a new loan instalment value on an average-value bonded property, from 15.4% in September 2016 to 5.3% as at January 2017 (using a 3-month moving average for smoothing). This most recent rate is below general inflation (CPI inflation still at above 6%), suggesting the coming of a genuine bond affordability improvement in real terms (assuming no further interest rate hikes along with ongoing house price growth weakness in the near term).
In 2017, this could also ultimately support some improvement in home demand.
Therefore, FNB’s model-driven forecast, based on the above mentioned economic growth and interest rate views for 2017, is for the number of new bonded home transactions to grow by a low but positive rate of +0.7% following an estimated -7.6% decline for 2016, and a more noticeable growth rate of 3% in 2018. The value of new bonded home transactions is forecast to grow by 2.2% in 2017 following an estimated -3.4% decline for 2016, also strengthening further to 5.6% in 2018.
A key upside forecast risk relates to how mortgage lending institutions respond to the recent mortgage market slowdown. Always looking for growth, it is possible that these institutions as a group begin to take on slightly more risk, and at more competitive pricing levels, in order to drive their new home loan sales growth where the “natural” growth in the market has stalled. There have been no strong signs of such moves yet, but in times of a lack of sales growth this is a possibility.
Read more here: FNB Mortgage Barometer – Mortgage Market Conditions – March 2017