Bank mortgage lending is drying up in South Africa

The South African Reserve Bank (SARB) says that banks have adopted a relatively conservative approach to mortgage lending.

Banks will understandably be taking a cautious approach in the short-to-medium term as a result of the fallout from the Covid-19 pandemic. The full financial effects of the virus on households is unknown, but is already having an impact on business and the macro economy.

The SARB expects a GDP contraction of 7% in 2020, the first full-year growth decline since 2009. This represents a substantial shock to the economy, as the worst full-year GDP growth performance in South Africa’s post-World War II history was -2.1% in 1992, it said.

The SARB’s Monetary Policy Committee announced its fourth interest rate cut of 2020 last week, which is good news for property owners, or those who want to get onto the property ladder.

The 50 basis points cut to 3.75%, its lowest level since it was introduced in 1998, takes the prime commercial lending rate to 7.25%.

However, Covid-19 has created a health emergency, but also significant financial stability risks, the Reserve Bank said in a Financial Stability Review on Wednesday (27 May).

“The virus has spread quickly across the world, forcing South Africa’s government, along with many others, to institute containment measures, including a shutdown of non-essential activity. The resulting shock to the economy has been swift and pronounced,” it said.

The SARB said that short-run cost of Covid-19 will be significant for the financial sector.

“Banks have already recorded losses on their holdings of financial assets, and are expected to experience an increase in non-performing loans (NPLs) over the coming months.

“The insurance sector is likely to face higher policy lapse rates as well as higher payout costs for claims relating to, among other things, business interruption, income protection, travel insurance, death and morbidity. Asset growth across the sector is also expected to be curtailed.”

The bank said that Covid-19 also poses longer-term financial stability risks. “These risks depend, to a large extent, on the duration and severity of the economic and health impact of the virus. For example, business continuity could be affected if infection rates reach elevated levels.

“The longer economic activity is curtailed, the greater the risk that the economy will not return to its pre-virus state.”

Lending challenges

Residential real estate prices appear fair relative to the cost of renting. The price-to-rent ratio is slightly above its historical average. However, it has been declining since 2016.

Banks have adopted a relatively conservative approach to mortgage lending.

The price-to-rent ratio is one of the measures that can be used to determine the affordability and profitability of owning residential property. It is also used as a metric to assess valuation in real estate markets, the SARB said.

Residential price-to-rent ratio

Banks have been allocating a declining share of total credit to residential mortgage advances. This ratio has trended down, from nearly 24% in 2012 to 18% currently, the Reserve Bank said.

Furthermore, nearly two-thirds of the residential mortgage credit extended in recent months was at a loan-to-value (LTV) ratio below 80%.

In other words, these are loans for which a down payment of more than 20% was received. Only around 6% of home loans was extended to borrowers who made no down payment or borrowed an amount greater than the value of the property – an LTV ratio of at least 100%, it said.

“This indicates that banks will be relatively well insulated in the event of a moderate fall in house prices because the underlying collateral values are, in most cases, above the loan size,” the SARB said.

Share of residential mortgage loans granted at different loan-to-value ratio levels

House price and residential mortgage advances growth

Mortgage affordability among households has gradually deteriorated, it noted. “There has been a modest, but consistent, increase in the share of residential mortgage payments that are 90 days overdue, increasing from 3.1% at the start of 2018 to 3.9% in February 2020.

“A further deterioration in loan quality is expected to come through in the second half of 2020.”

House price growth has been muted in recent years, increasing at levels below inflation since 2016. Based on data from the Bank for International Settlements (BIS), nominal house price growth has been moderating since 2018, slowing to an eight-year low of 3.3% year on year in January 2020, the bank said.

This is despite the modest upward trend in mortgage lending of late, which grew at 4.9% in the same month, it said.