29 May 2020
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’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.
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).
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.
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