Lowest mortgage advances growth since late 2004

Lowest Mortgage Advances Growth Since Late 2004

According to data released by the South African Reserve Bank, year-on-year (y/y) growth in mortgage advances by monetary institutions has dropped to its lowest level in more than 3½ years, with a growth rate of 20,6% y/y recorded in May this year (21,95 y/y in April). This was the lowest year-on-year growth in mortgage advances since October 2004 when it was 21,4%. In May 2008 mortgage advances came to R898,3 billion, a
doubling over the past three years in the total amount outstanding since a level of R449,2 billion was recorded in May 2005.

With residential mortgages having a share of more than 80% in total mortgage advances, the further slowdown in the growth in mortgage credit is largely a reflection of the housing market having cooled off, while there are signs that the commercial segment has also slowed down. Households’ financial strain increased in recent months as a result of rising inflation and interest rates. Mortgage repayments have risen by a total of 35,6% in view of the cumulative 500 basis point worth of interest rate hikes since June 2006.

In view of inflation remaining under upward pressure on the back of sharply higher fuel and food prices, a weaker rand exchange rate, and expectations of rising inflation over the short term, interest rates are expected to be hiked further by another 50 basis points at the next Monetary Policy Committee meeting in August. With commercial banks expected raise their prime lending and mortgage interest rates to 16% as a result, the
average mortgage repayment would have risen by more than 39% since mid-2006, putting further pressure on households’ finances and making housing even less affordable.

Taking into account the abovementioned developments and expectations, mortgage advances growth is forecast to continue its declining trend to well below current levels at year-end and into 2009, largely driven by the effect of the rising 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