New mortgage lending growth still in the doldrums

by John Loos

First quarter 2019 South African Reserve Bank (SARB) new mortgage lending data, released in the June SARB Quarterly Bulletin, showed a further year on year decline in the value of new mortgage loans granted, continuing to largely reflect the “contractionary” economic environment.

The commercial mortgage market appears to better reflect the current economic environment, accounting for much of the overall decline.

The June 2019 SARB Quarterly Bulletin showed the value of new mortgage loans granted – residential, commercial and farms – to have declined at a year on year rate of -7.82% in the first quarter of 2019, after a -2.07% decline in the final quarter of 2018. This is the third consecutive quarter of year on year decline, and is reflective of a very weak economic environment, real GDP (Gross Domestic Product) having contracted in the first quarter, and interest rates having risen slightly late last year.

With new mortgage lending often being a more “leading” part of the economy, we see that its cyclical growth turning points are traditionally often in line with or close to, timing-wise, the SARB leading business cycle indicator.

This leading indicator has been in year on year decline over the past few quarters, and a further year on year decline in the leading indicator in the second quarter to date (albeit a slightly diminished rate of decline) suggests that new mortgage lending growth likely remained in the doldrums in the second quarter too.

The large new residential mortgage sub-component strengthened slightly in the first quarter of 2019 to record moderate year on year growth of 6.09% in the value of new loans granted.

This is significantly stronger than the commercial mortgage component, which remained in negative territory to the tune of a -29.6% year on year decline in the first quarter.

The commercial mortgage lending decline probably better reflects the weak economic fundamentals than the residential mortgages component, the latter’s growth being partly driven by higher lender approval rates and increasingly competitive pricing, according to statistics from mortgage originator, ooba.

We also view new mortgage loans granted “by application”, that is, on existing buildings compared to vacant land and for new construction.

Typically, market and economic slowdowns bring about a more extreme decline in new building activity than in existing property transactions, and this means that mortgage lending for new construction of buildings is the most cyclical of the applications.

Indeed, this appears to be the case recently. Of the big two applications for mortgage lending – loans granted on existing buildings and land granted for construction – it was the latter that showed the biggest rate of year on year decline to the tune of -27.5% in the first quarter of 2019, while the loans granted on existing buildings category declined by a smaller -6.26%.

Growth in mortgage loans granted for vacant land found itself spiking to a positive 125.43% year on year in the final quarter of 2018, before receding to a still strong 29.23% rate in the first quarter of 2019. However, we would caution against reading too much into this recent spike, as this category makes up only a tiny 3.3% of total grants, and is thus subject to huge volatility.

With new building planning at mediocre levels of late, and economy-wide business confidence weak, we are not yet convinced that this summer quarter’s surge in vacant land mortgage lending represents any sustainable demand strengthening in the vacant land market.

New mortgage loans paid out saw a very small first quarter increase of 2.96%, from a slight decline of -0.7% year on year in the final quarter of 2018.

The trend in the value of capital repayments, which would be driven significantly by loan settlement upon sale of a property, was thus also in the doldrums, with a very slight decline of -0.7% year on year in the first quarter of 2019.

New mortgage lending growth remains in the doldrums, with the value of loans granted having experienced its third consecutive quarter of year on year decline as at the first quarter of 2019. Despite slight first quarter growth, the new loan payouts growth situation also remains weak.

This very much reflects the contractionary economic environment, with quarterly GDP growth having been negative in the first quarter of the year, and further year on year decline in both the SARB and OECD (for SA) leading business cycle indicators in the second quarter of 2019 to date suggests further near term weakness in the economy as well as in new mortgage lending growth. Moderate positive growth at best late in 2019 could be seen as a result of an expectation of mild near term interest rate cutting, but as long as the economy remains weak we don’t expect fireworks.

The new commercial mortgage loans approved category has shown the biggest decline of the two major sub-categories, and this appears to be more in line with the weak economic fundamentals than does the mild positive growth in the residential sub-category.

As was to be expected, the economic weakness has brought about a more extreme decline in new loan approvals for building construction than for mortgages on existing properties, the building sector being very weak at present.

John Loos is the property sector strategist at FNB Commercial Property Finance.