Rate hikes cut into new loans

Rate Hikes Cut Into New Loans

Johannesburg – While total mortgage loans have continued to grow, the value of new mortgage loans is falling – a sign that the 5 percentage point rise in interest rates over the past two years is putting a curb on borrowing.

Over the 12 months to May, banks’ total mortgage books rose by about a fifth, but Efficient Group economist Fanie Joubert said that only R10.3 billion in mortgage advances was awarded in May, “compared with an average monthly rise of around R14 billion during the previous 12 months”.

He commented yesterday after the Reserve Bank released data on private sector credit.

The falling trend in new mortgages granted has been in place for a while. John Loos, a property strategist at First National Bank, said that new mortgages and readvances fell 16.7 percent in the first quarter compared with the same quarter last year, while the value of new commercial loans fell “a massive 61.3 percent”.

Loos said that because the value of outstanding mortgages was large – R898.3 billion at the end of May – the trend in new loans was not immediately obvious. “Capital repayments on [mortgage] loans have been catching up with payouts. This suggests that growth in the value of mortgage loans outstanding will decline steadily for some time to come,” he said.

Over the 12 months to May, growth in total mortgages outstanding slowed from 21.9 percent in April to 20.6 percent, the lowest in three years, according to Jacques du Toit, a senior property analyst at Absa.

Stanlib economist Kevin Lings pointed out that the year-on-year growth figure, though still high, was well down from a recent peak of 30.9 percent year on year in October 2006.

Another pointer to the effectiveness of tight monetary policy is that growth in credit granted to households is falling – and would have fallen further if not for technical changes made in January, Lings said.

Annual growth in household debt slowed to 21.7 percent in May from 22.4 percent in April.

The Reserve Bank implemented a new accounting framework that cut the opportunities for banks to net off liabilities and assets, so their balance sheets appeared larger.

Before the disruption, Lings said, 12-month growth in credit to households had slowed to 19.5 percent from a peak of 28.2 percent in February 2006.

In January, when the adjustments were made, the growth figure jumped to 24.1 percent. The downward trend is now re-emerging.

Joubert said: “Another welcome development is that the ‘other credit’ item, which includes overdrafts and credit cards, decreased for the second month in a row – by R2.6 billion in April and R2 billion in May.

“This comes after strong rises during the first quarter.”

However, overall growth in private sector credit rebounded slightly to 19.7 percent in May, from 19.6 percent in April.

The high levels of overall debt could be due to distress borrowing, as consumers found themselves unable to meet their commitments, said Lings.

That would explain the “apparent disconnect between the credit figures and other data”.

These include a 28 percent drop in motor vehicle sales over the 12 months to May, and a fall in house prices.

When the Reserve Bank raised the official repo rate to 12 percent last month, it referred to the slowdown in the property market.

It said: “According to the Absa house price index, house prices in the middle segment of the market have been declining marginally in nominal terms, on a month-on-month basis, since February. The Standard Bank index shows the median house price declined 13.3 percent year on year in May.”

Despite this evidence that rate rises were doing what they were meant to do, Lings said, the repo rate was likely to be lifted at next month’s monetary policy meeting.

Authored By: By Ethel Hazelhurst
Published By: Business Report