New mortgage lending declining

(by John Loos, the household and property sector strategist at FNB Home Loans)

SARB new mortgage lending data showed a significant year-on-year drop in the first quarter of 2016.

An Easter weekend during March this year may have made some difference to the level of loans processed, but some decline has nevertheless been anticipated for some time now, with our various indicators of residential activity long since having pointed to slowdown approaching for mortgage lenders.

The June 2016 SARB (Reserve Bank) Quarterly Bulletin showed the value of new mortgage loans granted – Residential, commercial and farms – to have declined by -14.57 percent year-on-year for the first quarter of 2016.

This is significantly slower compared with positive growth of +15.2 percent year-on-year in the previous quarter, and now reflecting a very significant turnaround since the 50.2 percent year-on-year multi-year high reached in the first quarter of 2014.

Both the commercial and residential sub-components were drags on the growth rate in the first quarter. The value of residential mortgages granted declined by -13.8 percent year-on-year, while that of commercial mortgages declined by -14.9 percent in the same quarter. Both these sectors’ negative growth rates reflect a significant slowing on the prior quarter’s positive growth.

For the residential mortgage lending sector, the first quarter of 2016 was the third consecutive quarter of growth slowdown in the value of mortgage loans granted.

By comparison, the first quarter was the first quarter of slowing growth in the value of commercial mortgage loans granted slowing after an acceleration in growth in the prior three quarters.

The residential market is arguably the more leading sector, with home loans applicants responding more swiftly to any economic or interest rate changes. This market has long since begun to respond to rising interest rates since early-2014, as well as to four years of deteriorating economic growth, and slowing growth in new residential loans granted had for a while suggests that commercial grants would soon follow that trend at a later stage.

The FNB Estate Agent Survey’s Residential Activity Rating had been pointing towards such a slowdown in residential mortgage growth for some time. We use this activity rating as a leading indicator, with its smoothed year-on-year growth peaks leading new mortgage lending growth peaks by as much as three or four quarters.

After the residential activity rating’s year-on-year growth last peaked in the third quarter of 2014, it steadily slowed into negative growth territory by the second quarter of last year, and has remained in negative territory since. With a three quarter lag, the growth in value of new residential mortgage loans granted peaked in the second quarter of 2015, and has since tracked residential market activity lower.

Examining mortgage loans granted by application – on existing buildings compared to vacant land and construction – we see all three categories dipping into negative territory in the first quarter.

The largest decline was in the mortgage loans granted on vacant land category, whose value dropped by -23 percent year-on-year in the first quarter. The vacant land segment of the property market is normally the most cyclical, so this should not be surprising as interest rates rise and the economy shows weakness.

By comparison, the value of mortgage loans granted for construction and those granted on existing buildings declined by a lesser -11 percent and -14.85 percent year-on-year respectively.

Although new loans granted growth slowed quite sharply, that’s not to say that loans paid out would experience as severe a slowdown. However, slow down they did, and in the first quarter of 2016 the value of total mortgage loans paid out declined by -2.75 percent year-on-year, having steadily slowed all the way from strong positive growth of +52.6 percent back in the first quarter of 2014.

The broad slowdown in this growth more or less coincided with the onset of interest rate hiking early in 2014.

The slower growth in property activity volumes recently has also affected capital repayments growth since 2014. The value of capital repayments for the first quarter of 2016 declined by -16.9 percent year-on-year, down from the prior quarter’s positive +8.4 percent growth.

This slowdown in capital repayments growth should also be expected when a slower rate of growth in properties being bought and sold slows the rate of loan settlement on transacting.

The first quarter 2016 rate of decline in new mortgage loans granted may be slightly overdone by an Easter weekend having shifted to March this year. Nevertheless, many economic, and our own leading property indicators have long suggested that slowdown should be expected. It is even possible that certain lenders have become tougher on their lending criteria in response to deteriorating economic conditions.

A first quarter real GDP contraction, further rise in interest rates during the first quarter of 2016, and our FNB Residential Activity rating still firmly in year-on-year decline, suggests to us that further decline in the value of new mortgage lending is likely in the near term,

On the non-residential side, too, almost recessionary conditions are unlikely to boost demand growth for commercial mortgage loans either.

The residential market is often a leading segment in the overall mortgage market, which means it can be a leading indicator of trends to come in the commercial mortgage market and thus in the overall market. The residential mortgage segment has already seen slowing new mortgage grants growth for a number of quarters to date, which should suggest further near term weakening for the non-residential mortgage segment to come.

Examining mortgage loan grants by application, it is likely to be mortgage loans granted for both vacant land and for construction purposes that slow more sharply compared to the less cyclical existing buildings category.

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