Lean times for lenders
Nearly two-thirds of new advances business wiped out this year
SOUTH AFRICA’S multibillion rand mortgage lending industry may well be in a healthier state than its counterparts in the United States and Britain but 2008 is nevertheless turning out to be a real annus horribilis for local banks and mortgage originators.
Waning appetite for credit on the back of higher interest rates, higher debt servicing ratios and the introduction of SA’s National Credit Act in mid-2007 have caused a massive slide in demand for housing finance since the beginning of this year.
Latest SA Reserve Bank figures show the value of total new mortgages and re-advances granted on residential property fell by -31,5% in second quarter 2008 (year-on-year).
FNB property strategist John Loos forecasts the total value of new mortgages and re-advances to slump to around R256bn in 2008, down 30% from R364,6bn in 2007. His forecasts are based on Bank figures.
However, Saul Geffen, CEO of mortgage originator ooba (the former MortgageSA), says those figures don’t reflect the full extent of how weak the residential property market currently is, as they include re-advances on existing mortgages.
Ooba’s research shows if you strip out re-advances the value of new mortgages approved on actual housing sales by all SA mortgage lenders dropped by more than 60% between January and September (yearon-year).
Mortgage lending has been smacked by a combination of falling property sales, higher deposits required by banks and a higher mortgage application decline rate. Geffen says in September last year 76% of all mortgage applications generated through ooba were successfully converted. In September this year the conversion rate dropped to 65,5%.
Similarly, banks are asking buyers to put down bigger deposits, consequently disqualifying more potential home buyers. Geffen says the average deposit required by banks has increased to 18,6% from 12,2% in the 12 months to September this year.
Ooba’s figures correspond with those reported by FNB Home Loans CE Jan Kleynhans, who has seen a drop of around 60% in FNB’s new mortgage business for the year to date.
The Bank’s figures show the last time the value of new residential mortgages dropped in nominal terms for more than one quarter was in 1998, following the Asian crisis. At the time, the value of new mortgages granted by SA banks dropped by around 15% over a 15-month period before bouncing back into positive growth territory.
Gavin Opperman, group executive at Absa’s secured lending division, says their new mortgage business is down by 35% from January to August, but this time around the downturn is expected to be longer and stronger than in 1998.
Opperman says back then mortgage lending was dampened mainly by higher interest rates, with lending patterns recovering quickly once rates dropped. “Things are very different now. The market faces a number of other challenges besides local macroeconomic factors.” He cites the turmoil in global financial markets as a key threat. He says although SA’s banks have been more prudent in their lending practices than to US banks and are not really exposed to subprime loans, SA isn’t “ring-fenced” from what’s happening worldwide.
Social and political issues in SA, plus a growing shortage of property stock, particularly in the affordable segment of the market, are other issues expected to place continued pressure on demand for housing finance. Opperman doesn’t expect any noticeable recovery in mortgage demand before end2009.
Loos expects the value of new mortgages and re-advances to slide a further 8% to R236bn in 2009 before bouncing back strongly in 2010 as residential property demand recovers. But Loos says just how long the current downturn will last will ultimately depend on the length and breadth of a potential US recession.
He says it would be naïve to think SA’s housing market wouldn’t be affected by global recessionary and deflationary issues. “Economic growth risks emanating from the US have now taken over from inflation and rising interest rates as the key risk to SA’s property market.”
Housing picture looks “pretty grim”. John Loos