Property & Wealth

Homeowners feel the pinch as mortgage market turns

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South Africa’s hard-pressed homeowners may breathe a sigh of relief after the Reserve Bank’s monetary policy committee kept the repo rate at 7% last month and hinted that an end to the rate-hiking cycle might be in sight.

However, consumers are not yet spared as an end to rising interest rates hinges on the state of the economy, the rand, and inflationary pressures that the local unit might bring.

Interest rates have risen by 200 basis points since the start of the rate-hiking cycle in 2014, which has begun to dampen the more than R750 billion worth mortgage loan market.

Underscoring the impact are the latest Reserve Bank figures, which show that the value of new residential mortgages granted continued to decline by 10.27% year-on-year in the second quarter of 2016.

For a graph of what has been happening with th vlue of morgage loans of the last four years, please click here. (Source: FNB.)

The odds are stacking up against consumers as they face sluggish income growth, rising unemployment and living costs on the back of an economy that is expected to grow by 0.4% for 2016, according to the World Bank.

FNB property strategist John Loos said in addition to rising interest rates, the state of the economy is also weighing on the mortgage loan market. “We are seeing the impact the most on first-time home buyers who are dependent on the pace of job creation and economic growth,” he added.

Data from FNB indicates that first-time home buyers (as a percentage of total buyers), fell by 18% for the third quarter of 2016 from the peak of 28% in the second quarter of 2014.

Bank financial results

Judging from the recent financial results of the country’s major banks, rampant interest rate hikes are also making it difficult for households to afford their home loan repayments.

Barclays Africa – historically the largest mortgage loan provider, but now second after Standard Bank – has been hit by the on-going consumer pressures.

The bank’s impairments on its home loans – where consumers struggled to service their mortgage payments – spiked by 77% and new home loan volumes declined by 10.3% in the six months to June.

Head of home loans Carel Grönum said its level of soured loans was expected.

“The expectation was based on the fact that we did see the strain of the consumer and the increase of interest rates which impact their affordability dynamics. All these factors translated to higher delinquency levels,” Grönum told Moneyweb.

Although the impairments are at “manageable levels”, for Barclays Africa to get its mojo back, Grönum said the focus will be on collections and recoveries from consumers, assisting customers in need and “act decisively on those who can’t pay.”

The bank was the hardest hit from the 2007/8 global financial credit crisis and housing slump, recording losses of nearly R1 billion in 2012.

Barclays Africa’s home loan division has been in turnaround mode over the past three years to arrest losses by taking a conservative approach to its lending appetite, reducing its exposure to the low-deposit consumer segment, bolstering customer service and its relationship with mortgage originators.

Its market share of the home loans market has grown to 25% from 19% two years ago.

Grönum said banks require on average a 20% deposit on loans and are still selective on the type of properties they will finance. “There is still risk in financing vacant land and leisure properties,” he said.

Nedbank has also been in turnaround mode since mid-2009. Its home loan credit losses reached 0.2% for the six months to June 2016 from 2.5% in 2010. And defaulted loans have steadily declined from 14.7% in 2010 to 3.1%.

FirstRand’s FNB has taken a conservative approach to its lending and pulled back its risk appetite. Residential mortgages grew by 4% and arrears rose above 2% for the year to June.

Standard Bank appears to be riding the household slump much better. In 2011, the bank ramped up its strategy of extending mortgages while its competitors were scaling back and monitored the risk profile of its customers.

And this is starting to pay off.  In the six months to June, credit impairments in the home loan business fell by 13% and the credit losses (losses on loans benchmarked against total loans advanced) declined to 0.6% from 0.8% in June 2015.

Standard Bank has a mortgage loan market share of 30%.

Despite the consumer drag, Standard Bank home loans head Steven Barker said the home loan market is still active and competition among banks has heated up in recent months.

“In last five years, the market has taken its time to recover and is increasingly getting back on its feet. We have seen mortgage lending growing, but in absolute marginal terms. Mortgage lending is not even growing in line with inflation,” said Barker.

He doesn’t believe that there will be a marked improvement in the volume of mortgage loan applications considering the subdued consumer and economic environment.

Changes to the regulatory environment, with the amendments to the National Credit Act seeking to limit reckless lending practices by financial services providers and Basel III, a regulatory framework which requires banks to be well capitalised for rainy days – has made the dishing out of home loans difficult.

Mortgage approval rates

Shaun Rademeyer, CEO of mortgage originator BetterLife Home Loans, said approval mortgage rates for prospective homeowners are still healthy.

For every ten applications that BetterLife Home Loans submits to banks, seven get a mortgage loan offer. “It might not be exactly what the customer asked for but we normally have about 70% of those customers taking up the offer. It could be that the customer asked for a 90% mortgage but the bank will give them 80%,” said Rademeyer.

This is a marked improvement from 25% of customers that would take up the loans offered by banks during the height of the credit crisis. And the approval of 100% mortgage loans is starting to become a thing of a past.

Also, those already in the housing market shouldn’t expect a rousing capital appreciation on their homes. Absa Home Loans property analyst Jacques du Toit expects nominal house price growth (before accounting for inflation) of 4% to 4.5%, well below the 6% for 2015.

(This article was first published by Moneyweb Today)

by Ray Mahlaka

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