Lean times for lenders

Nearly two-thirds of new ad­vances busi­ness wiped out this year

Finweek English Edition - - Property - JOAN MULLER joanm@fin­week.co.za

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

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