Mortgage advances growth continues to slow down
In July 2008 year-on-year (y/y) growth in mortgage advances by monetary institutions taperedoff further to 19,1% from 19,9% in June, based on data released by the South African Reserve Bank. This brought the total amount of mortgage balances outstanding to R923,1 billion at the end of July (R908,8 billion at the end of June). On a month-on-month basis mortgage advances growth was somewhat higher at 1,6% in July from 1,2% in June.
The year-on-year growth in mortgage advances to the household sector, mainly related to residential property, was also lower at 22,9% in July (24,0% in June). The amount of outstanding mortgage balances in the household sector was R672,8 billion in July, having a share of 72,9% in total mortgage debt, which comprises commercial and residential mortgages. It should, however, be noted that data with regard to mortgage advances to households are distorted on the back of changes in reporting methods and data classification related to Basel II as from January 2008. These changes imply that the year-on-year growth in mortgage credit extended to the household sector is markedly higher since the beginning of the year than would otherwise have been the case.
The continuing declining trend in mortgage advances growth is a reflection of a residential property market that has cooled off markedly since late 2007 on the back of surging inflation and rising interest rates, causing household finances to come under severe pressure. Nominal house price growth slowed down to a 9-year low of 3,2% y/y in July 2008, whereas prices were down by around 9% y/y in real terms in the month. That was the biggest real year-on-year decline in house prices since late 1992. Year-on-year growth in nominal house prices is set to be significantly lower in 2008 and 2009 compared with recent years, while prices are forecast to drop in real terms this year and next year.
The abovementioned developments are also evident from the year-on-year flow in total mortgage advances, which was down by 9,5% in July. The year-on-year flow in mortgage advances to households was also lower in July compared with recent months.
After the cumulative 550 basis points worth of interest rate cuts in the second half of 2003, levels of activity and price growth in the residential property market accelerated markedly. As a result of the consequently higher demand for housing by owner occupiers and property investors, the demand for mortgage finance increased significantly. The ratio of household mortgage debt to disposable income increased from a level of 29,4% in the fourth quarter of 2003 to 49,1% in the first quarter of 2008, keeping in mind the abovementioned data distortions. The rising household mortgage debt ratio, in conjunction with the tightening of monetary policy since June 2006, caused the cost of servicing household mortgage debt to increase from 4,1% of disposable income in the first quarter of 2006 to 7,1% in the first quarter of 2008. These developments are a reflection of the 35,6% rise in mortgage repayments on the back of the cumulative 500 basis points worth of interest rate hikes since June 2006.
The CPIX inflation rate jumped to an all-time high of 13% y/y in July 2008 from 11,6% y/y in June. Higher electricity, food and fuel prices were the main driving factors behind the latest surge in inflation. The fuel and power component of CPIX increased by a massive 23,9% y/y in July, while the food component was up by 18,5% y/y in the month. However, with CPIX inflation forecast to peak in the near future, together with evidence of the economy responding to the tightening of monetary policy over the past two years and methodological changes to the calculation of consumer price inflation early next year, the Reserve Bank is believed to keep interest rates unchanged up to the middle of 2009 when a rate cut is expected.
In view of these developments and expectations, mortgage advances growth is forecast to continue to slow down towards the end of the year as a result of the interest rate cycle, as well as the impact of the National Credit Act and the severe financial pressures consumers are experiencing in general.
