Bank mortgages are drying up in South Africa


The South African Reserve Bank (SARB) says banks have taken a relatively conservative approach to mortgage lending.

Banks will naturally take a cautious approach in the short and medium term due to the fallout from the Covid-19 pandemic. The full financial effects of the virus on households are unknown, but are already having an impact on businesses and the macroeconomy.

The SARB expects GDP to contract 7% in 2020, the first drop in full-year growth since 2009. This represents a substantial shock to the economy, as the worst full-year GDP growth performance in the year The history of South Africa after World War II was -2.1% in 1992, he says.

The SARB’s Monetary Policy Committee announced its fourth interest rate cut for 2020 last week, which is good news for homeowners or those looking to step up the real estate ladder.

The 50 basis points reduced to 3.75%, its lowest level since its introduction in 1998, brings the prime rate on commercial loans to 7.25%.

However, Covid-19 created a health emergency, but also significant risks to financial stability, the Reserve Bank said in a financial stability review on Wednesday (May 27).

“The virus has spread rapidly across the world, forcing the South African government, along with many others, to institute containment measures, including shutting down non-essential activities. The resulting shock to the economy was swift and pronounced, ”he said.

The SARB has said the short-term cost of Covid-19 will be significant to the financial sector.

“Banks have already recorded losses on their holdings of financial assets and are expected to experience an increase in non-performing loans (NPLs) over the coming months.

“The insurance industry is likely to face higher lapse rates as well as higher reimbursement costs for claims related to, among other things, business disruptions, income protection. , travel insurance, death and morbidity. Asset growth in the sector is also expected to be reduced. “

The bank said Covid-19 also poses longer-term financial stability risks. “These risks depend, to a large extent, on the duration and severity of the economic and health impact of the virus. For example, business continuity could be affected if infection rates reach high levels.

“The more economic activity is reduced, the greater the risk that the economy will not return to its pre-virus state.”

Loan challenges

Residential property prices seem fair relative to the cost of renting. The price / rent ratio is slightly above its historical average. However, it has been declining since 2016.

Banks have taken a relatively conservative approach to mortgage lending.

The price / rent ratio is one of the measures that can be used to determine the affordability and profitability of residential property. It is also used as a metric to assess valuation in real estate markets, the SARB said.

Residential price / rent ratio

Banks are allocating a decreasing share of total credit to residential mortgage advances. This ratio has trended downward from nearly 24% in 2012 to 18% currently, the Reserve Bank said.

In addition, almost two-thirds of residential mortgages granted in recent months had a loan-to-value ratio (LTV) of less than 80%.

In other words, these are loans for which a down payment of more than 20% has been received. Only about 6% of home loans went to borrowers who failed to make a down payment or borrow more than the property’s value – an LTV ratio of at least 100%, the statement said.

“This indicates that banks will be relatively well protected in the event of a moderate decline in house prices, as the values ​​of the underlying collateral are, in most cases, greater than the loan amount,” SARB said.

Share of residential mortgages granted at different loan-to-value ratio levels

Home prices and residential mortgages drive growth

The affordability of mortgage loans for households has gradually deteriorated, he noted. “There has been a modest, but steady increase in the share of 90-day late residential mortgage payments, from 3.1% at the start of 2018 to 3.9% in February 2020.

“A further deterioration in loan quality is expected to occur in the second half of 2020.”

House price growth has been subdued in recent years, increasing to below inflation levels since 2016. Based on data from the Bank for International Settlements (BIS), nominal house price growth has slowed down. moderate since 2018, slowing to an eight-year low of 3.3. % over one year in January 2020, the bank said.

This despite the modest upward trend in mortgages of late, which rose 4.9% in the same month, he said.

Read: The average net salary in South Africa during the lockdown


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