Where all the mortgage credit is going

Something odd has happened in SA’s lending markets since Covid-19. There has been a remarkable acceleration in mortgage credit granted.

The lockdowns of 2020 led to a dramatic fall in lending across all credit types, but the recovery since has shown a surprising outperformance of mortgages. Secured credit (largely vehicle finance) has resumed its pre-Covid trajectory and unsecured credit granting has lagged. But mortgage levels are beating records from before the global financial crisis.

Some of the explanation is undoubtedly that the lockdowns led to pent-up demand, as new homeowners were forced to delay taking transfer, which flooded back on the resumption of activity.

However, in rand amounts, the total mortgage lending in the 10 quarters since the start of 2020 now marginally exceeds the previous 10 quarters. So even with the lockdown period included, there has been more mortgage lending than before.

Plus, while we should expect some recovery post the lockdowns, these should have caused a pause in the housing market, pushing everything into the future and causing an overall fall in property activity.

Indeed, property sales did fall and have not recovered — in 2021 there were 305,000 property transfers recorded by the deeds office, whereas in 2019 there were 353,000 (there were 270,000 in 2020 when lockdowns disrupted the market).

So, the mortgage growth figures are not being driven by more property purchases, so much of the lending is happening to existing homeowners. Scratching into the National Credit Regulator’s statistics gives more clues.

All the additional lending has been in larger mortgage sizes — over R700,000. In that category the previous quarterly record was the R36bn lent in the third quarter of 2019; but in the second quarter of 2021, R58bn was lent, 61% more. Indeed, smaller mortgages, those below R350,000, have continued their long-term declining trend.

The after-effects of lockdowns and the wide economic outlook do not presage a great credit market.

Reserve Bank statistics for the banking industry show that impairments for bad debt have been growing since the lockdowns, as we’d expect. Overall, then, bank credit appetite has been tepid.

Here is my view on what is going on. First, until the last quarter 2021, prime interest rates were at the lowest level since the 1960s. Compounding the low prime rate, data from mortgage broker ooba shows that lenders have been offering the biggest discount to prime rates on mortgages since 2010. Mortgage borrowing is one of the most straightforward ways to access this low-cost finance. So low rates have unsurprisingly done the trick of encouraging more borrowing.

What are people doing with the money? Ooba’s data shows there has been significant growth in transactions for properties worth more than R1.5m, suggesting people are buying more expensive properties. The data also shows a lot more borrowing for buy-to-let properties.

Those who are borrowing against existing properties seem to be doing it to finance home alterations. Stats SA figures for building plans passed for alterations by larger municipalities reveals record numbers in recent months.

Those record numbers are focused on the Western Cape, which is also the province with the highest level of overall credit growth. Of alterations plans passed, in the third quarter of 2022, 31% were in the Western Cape whereas in the equivalent quarter of 2019 it was 25%.

So, these factors explain the mystery: borrowers took advantage of very low interest rates, leveraged up their existing properties and used the money to make additions and alterations, or to buy more expensive homes than they otherwise would have, or to buy properties they will let out, particularly in the Western Cape.

Bankers I speak to say that the underlying work-fromhome trend has been a major theme and the data is consistent with that. Large numbers of people seem to be improving their homes particularly in more “lifestyle” destinations like the Cape.

Can we expect this trend to hold? The rebound in interest rates is obviously one factor leaning against it. Rates are now back at pre-lockdown levels, though still some way below the average levels of the past 40 years. The bigger driver might be the future trend in workfrom-home.

No doubt the baseline of those working from home, particularly for higher income employees, will be higher than pre-Covid for the long term. There may be some rebalancing with more office presence over time, but never to previous levels.

So, demand for home improvements from those spending a great deal more of their days at home will be robust. Overall, I expect mortgage lending to continue to show strength.