South African mortgage advances growth slowing down further

South African Mortgage Advances Growth Slowing Down Further

In February 2008, year-on-year growth of 23,1% was recorded in mortgage advances by monetary institutions (24,5% in January), according to data released by the South African Reserve Bank. This brought the total amount of mortgage advances to R871,5 billion in February. On a month-on-month basis, mortgage advances growth was lower at 0,8% in February from 1,2% in January.

With residential mortgages having the biggest share in total mortgage advances, the abovementioned further slowdown in the growth in mortgage credit is largely a reflection of a housing market still cooling off. Nominal year-on-year house price growth is already in single-digit territory, whereas real year-on-year price growth is virtually zero. The expectation is for the housing market to slow down and price growth to taper off further in 2008, mainly driven by high interest rates on the back of rising inflation, and the effect of the National Credit Act on household sector credit extension, with the affordability of housing being adversely affected by these factors. CPIX inflation is under significant upward pressure as a result of oil price, rand exchange rate and food price movements, while a proposed sharp electricity price increase will push inflation to even higher levels.

These factors are set to influence inflation expectations and wage demands this year. In view of these developments, the Reserve Bank’s Monetary Policy Committee will face a difficult task next week when deciding on the way forward for interest rates.

Mortgage advances growth is expected to continue its declining trend in the rest of 2008, driven by the lagged effect of the higher interest rates, the impact of the National Credit Act, and the difficult financial conditions consumers are experiencing in general. These factors, as well as a slower pace of economic expansion, lower growth in real household disposable income, and a slowing housing market this year are set to contribute to yearon-year mortgage advances growth of below 20% projected by year-end.

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