New data from the SA Reserve Bank confirms that the country’s banks enjoyed a bumper 2021 on the mortgage-lending front.
New mortgage loans and re-advances granted to households by all financial institutions clocked in at a colossal R403.4bn last year. That’s nearly 70% more than the R242bn banks added to their residential mortgage books in 2019, before the Covid-19 pandemic, according to the Reserve Bank’s March quarterly bulletin.
Just how aggressively banks are vying for a larger slice of SA’s lucrative R1.6-trillion home-loan pie is underscored by Rhys Dyer, CEO of mortgage originator ooba. He says competition among the major banks remains “fierce”, despite interest rates rising again from late November.
Since then, three 25 basis-point hikes have been announced by the Bank, taking the prime lending rate to 7.75%.
Dyer refers to the average interest-rate concession granted by banks on ooba mortgage applications reaching prime minus 0.21% in the fourth quarter. That’s up from prime minus 0.02% a year earlier.
“Banks continue to compete for business through strong interest-rate discounts, while simultaneously approving more bonds with lower deposit requirements, creating advantageous lending conditions for home loan applicants,” he says.
For instance, the overall bank approval rate achieved by ooba increased from 80.4% to 83.4% year on year in the fourth quarter. Banks have also made it more attractive for homebuyers to apply for a mortgage by lowering their cash deposit requirements — from an average 9.2% to 7% of the purchase price over the same period.
In addition, Dyer says banks are more willing these days to approve zero-deposit home loans. In fact, 57% of ooba’s applications approved by banks in the fourth quarter were 100% loans.
I do expect the arrears percentage to tick up mildly as rates rise, but to peak at levels well below 2008/2009
— John Loos
Still, it seems rising rates have started to curb home buyers’ exuberance. John Loos, FNB property sector strategist, says while year-on-year growth in the value of approved new home loans reached a record high of 135.3% in the second quarter of 2021, growth decelerated sharply in the third and fourth quarters, at -2.64% and -1.58% respectively.
Loos ascribes the second-quarter spike largely to the low base created by the previous year’s hard lockdown. “Residential mortgage extension grew very strongly in the latter stages of 2020 after hard lockdown restrictions eased and home buyers responded to the Reserve Bank’s early 2020 interest rate cuts,” he says. “And so, by the second half of 2021, a lack of further interest-rate hiking since early 2020 caused the demand stimulus to wear thin.”
Loos expects the three rate hikes since late November — and more to come — to put a further brake on mortgage demand and housing sales this year as affordability concerns will probably deter consumers from taking on more debt.
Every time rates increase, monthly loan repayments do, after all, become more expensive. Figures from BetterBond’s calculators show that the increase in the prime lending rate from 7% to 7.75% has already pushed up monthly repayments on every R1m owed to the bank by R460. That’s for a mortgage loan term of 20 years at prime. So someone who has a R3m mortgage is now paying R1,380 a month more than they did four months ago.
The question is whether rampant mortgage lending will come back to bite the banks. Will rising interest rates, amid record high unemployment levels, cause already overstretched households to default on bond repayments?
Loos believes it’s unlikely that SA is heading for a spike in mortgage arrears similar to the one that occurred in the wake of the global financial crisis 13 years ago. He refers to recent data from the National Credit Regulator, which shows a mild uptick in mortgage accounts in arrears — from 8.2% in 2016 to 8.625% in the third quarter of last year.
But that’s still way below the high of 16% in early 2009.
“I do expect the arrears percentage to tick up mildly as rates rise, but to peak at levels well below 2008/2009,” Loos says. He cites two reasons: “First, we don’t forecast the prime rate to even go as far as 10% in the current hiking cycle, which is far lower than in 2008 when prime peaked at 15.5%. Second, household indebtedness levels are significantly lower than they were in 2008.’’
Three rate hikes since late November, and more to come, are likely to put a brake on mortgage demand and housing sales this year
— What it means:
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