Growth in mortgage advances slowing down further

Growth in Mortgage Advances Slowing Down Further

Year-on-year (y/y) growth in mortgage advances by monetary institutions declined further in June 2008 to its lowest level in almost 4 years. A growth rate of 19,9% y/y was recorded in June compared with 20,6% y/y in May. This was the lowest year-on-year growth in mortgage advances since the 19,5% registered in August 2004, and well below the 31% y/y growth rate recorded in October 2006 when mortgage advances growth peaked.

The further slowdown in mortgage advances growth is to a large extent a result of the housing market having cooled off markedly in recent times. This is also evident from calculating the annual flow in mortgage advances, which was down by 6,5% y/y in June.

The granting of new mortgage loans by the banking sector on residential property was also significantly lower in the first quarter of 2008 compared with a year ago. These developments on the property front are largely a reflection of the household sector that is under severe financial pressure on the back of the tightening in monetary policy since mid-2006. The upward trend in interest rates has caused mortgage repayments in general to rise by 35,6% over the past two years.

Although CPIX inflation is well above the 6% level, it is expected to peak in the near future and to gradually decline over the next 18 to 24 months. Economic activity is slowing down over a wide front, with conditions deteriorating further in various sectors of the economy. These developments, together with a lower international oil price and a stronger rand exchange have reduced the risk of interest rates being hiked again at the Monetary Policy meeting in August. However, currency and oil and food price volatility may keep inflation and interest rates under upward pressure.

Mortgage advances growth is projected to taper off further towards the end of 2008, largely driven by the effect of the higher interest rates, the effect of the National Credit Act on credit extension by financial institutions to consumers, the difficult financial conditions consumers are experiencing in general, and the slowdown in the housing market.

Authored By: Jacques Du Toit
Published By: Absa Home Loans