The extent to which cash-strapped consumers are feeling the pain of the 40% rise in debt repayment costs since November 2021 is underscored by the most recent mortgage default data.
Absa, the second-largest home loan lender in South Africa after Standard Bank, this week reported a 258% year-on-year surge in credit impairments in its R298bn mortgage book for the six months to June — from R272m to R975m.
That compares with an overall 60% increase in impairments across Absa’s lending products.
Last week, Nedbank reported an overall 57% increase in impairments for the six months to June, which CEO Mike Brown said was most notable in rate-sensitive segments such as mortgages and personal loans. He described the operating environment in the first half of 2023 as “much more challenging than we had initially forecast’’.
Standard Bank Group financial director Arno Daehnke echoed the sentiment during the bank’s pre-close update in June, saying home loan impairments are now at “elevated levels, with some customers being unable to meet their debt obligations in full’’.
Rising distress among South African homeowners comes on the back of 10 consecutive interest rate increases in 18 months, which pushed banks’ prime lending rate from 7% to 11.75%.
The question arises whether banks were too aggressive in increasing their slice of the lucrative R1.2-trillion home loan market in 2020/2021, when prime was at near 50-year lows. If so, is the housing market heading for widespread distressed selling and repossessions?
Most banks have already introduced relief measures to help struggling consumers to hold on to their homes
— Andrea Tucker
Absa financial director Jason Quinn dismisses the notion that banks were overzealous in trying to grow market share. Speaking at the bank’s results presentation, he said Absa’s mortgage book grew by only 4% in 2020 and 9% in 2021. In the six months to June the home loan book rose by a further 6% to R298bn.
“That is not excessive,’’ he said. “In fact, our market share has remained in the 23%-24% range for the past five years.’’
Referring to the bank’s credit-loss ratio, a metric used by banks to gauge default risk, Quinn said these levels are still well below previous peaks.
Absa’s mortgage credit-loss ratio rose to 65 basis points (bp) in the six months to June, up from 19bp a year earlier. Still, that compared favourably with the record high of 190bp recorded after the 2008/2009 global financial crisis and the 88bp seen during the pandemic in 2020, said Quinn.
Despite the increase in Absa’s home loan delinquency bucket, he doesn’t believe the market is heading for the same scenario as in 2008/2009, when banks had to repossess large numbers of properties.
He said circumstances that led to widespread distressed selling back then were very different from what’s happening now. “There was a substantial boom in mortgage lending leading up to the financial crisis, and loan-to-values were much higher.’’
Quinn said this time around affordability issues are related to the big jump in interest rates, which is a temporary phenomenon. Absa expects the Reserve Bank to begin measured rate cuts in the first half of 2024.
Meanwhile, Quinn said, Absa is working “swiftly” with customers who are battling financially. “So we don’t expect to see a marked increase in repossessions. It’s a very small portion of our book.”
Latest data from the National Credit Regulator shows that mortgage defaults (number of loans in arrears for more than 30 days) across all lenders have ticked up steadily over the past 18 months — from 9% in the third quarter of 2021 to 11.15% in the first quarter of 2023. That compares with a 16% high in early 2009.
Andrea Tucker, director of online bond aggregator MortgageMe, says distressed selling is starting to happen in pockets of the housing market. It’s not unexpected, she argues, given how consumers’ disposable income has been squeezed by rising debt servicing and living costs. For instance, the monthly repayment on a R2m mortgage has increased by more than R6,000 since November 2021 — from R15,506 to R21,674 (repaid at prime over 20 years).
But Tucker believes banks will be doing whatever they can to avoid repossessions, “which cost them money, cause undue stress on their customer base and end up being a lose-lose situation for all parties involved’’. She says most banks have already introduced relief measures to help struggling consumers to hold on to their homes.
This includes short-term payment holidays and extending repayment periods from the traditional 20 to 30 years. However, Tucker warns that the latter can cost homeowners dearly: “This is a completely new credit agreement, and the bank is entitled to adjust your interest rate upwards. There will also be upfront costs to entering a new contract with the bank.’’
She adds: “Make sure you pay off your loan as quickly as possible when rates come down.’’
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