New mortgage lending: 2017 may be weaker than 2016

THE SOUTH Africa Reserve Bank 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, says John Loos, FNB’s Household and Property Sector strategist.

Loos predicts that positive growth here could happen any time in the second half of the year. However “such a late-2017 turn may be too late to prevent this year from being a weaker year, from a new mortgage lending point of view, than 2016 overall”.

Using Deeds Office data for property transactions registered by individuals under R10 million in value, believed to be overwhelmingly residential transactions, FNB estimated the trends in total transactions as well as the split between bonded transactions and un-bonded (“cash”) transactions.

“While deeds data volumes for November and December probably remain incomplete, we can use the existing sample to gain insight as to mortgage market strength by 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, says Loos, 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.”

But looking forward, he says, there “may be some early signs” that some mild turnaround was approaching. This came in the form of the SARB Leading Business Cycle Indicator that had been slowly turning to positive growth after a few recent years in negative territory.

The Leading Indicator broadly tracks the growth direction of FNB’s 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 economic improvement can ultimately translate into improving growth in new residential mortgage lending.

“To attempt an answer to this, FNB compared the peaks and troughs in growth in the smoothed FNB Residential Market Activity Rating.”

Loos said that “activity”, for estate agents, was about a variety of factors, from inquiries about buying or listing, from actual listing to the number of feet through doors at show houses. With a considerable lag, a portion of such activity turned 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-onyear, if the SARB Leading Indicator was anything to go by.

“If the third 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 third quarter of 2016, the value of new Household Sector mortgage credit granted (using National Credit Regulator 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.

“Analysing prior bottom turning points in the yearon-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… 4 to 6 quarters.”

If the lagged relationship held up, and assuming the third quarter of last year represented rock bottom, “it would suggest that we would only start to see some turn for the better in the rate of yearon-year decline in new mortgage lending somewhere in the second half of 2017”.