Trends in mortgage lending and what they mean for future property market activity

Mortgage finance is the fuel that drives the property industry. The South African Reserve Bank (SARB) leading indicator is an excellent predictor of the general direction of the value of mortgage loans granted. This index grew at 6.55% at the beginning of 2017, which was its most recent peak, after which it slowed to 2.05% by the third quarter of 2018 - thereby predicting that we were due for slower new mortgage lending growth.

By Andreas Wassenaar

20 Feb 2019

Trends in mortgage lending and what they mean for future property market activity

This was confirmed by the December 2018 SARB Quarterly Bulletin, which showed that the value of new mortgage loans granted for residential and commercial property and farms had declined at a year-on-year rate of 15.91% in the third quarter of 2018, from a 6.08% positive growth rate for the previous quarter.

If we consider the subcomponents of mortgage loans granted, we see that according to FNB's published figures, the large residential mortgage loans subcomponent slowed to 3.01% in the third quarter of 2018, from a positive 7.45% year-on-year growth for the second quarter. The commercial mortgage loans segment subsided more significantly, from +3.17% in the second quarter to minus 32.02% in the third quarter of 2018. This relatively large decline in the commercial sector shows the massive impact that very low GDP growth and low business confidence has on expansion decisions in the business sector.

Slowdown in new mortgage loans granted

If we consider the new mortgage loans granted for existing buildings versus vacant land versus new construction, we see that FNB’s figures show a slowdown in all three areas. The largest decline by application type was a 28.12% reduction in new mortgages granted for construction purposes, indicating that building space completions will be weak for 2019. New mortgages granted on existing buildings declined by 14.38%. Mortgage loans granted for vacant land declined by a lesser 11.4% year on year in the third quarter of 2018.

The growth of new mortgages paid out dropped in line with the decline in new mortgages granted. FNB reports that this figure declined to -7.25% in the third quarter of 2018, from +4.38% in the prior quarter. With fewer sales happening, the value of capital repayments in the third quarter of 2018 remained low at +1.49%.

Therefore the forecast for 2019, based on the most recently published figures, is that mortgage lending is expected to start slow off a low base, reflecting the direction of the SARB leading economic indicator. Recovery in mortgage lending as the year progresses will depend on real economic growth. This has been estimated to be 0.7% for 2018 but improving to a predicted 1.4% for 2019. Sentiment is likely to play a significant role this year, given the uncertainty currently prevailing within the political landscape.