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New Home Loans show effects of interest rate cuts

Although the Reserve Bank’s new mortgage loan numbers remain weak, the mildly diminished rates of year-on-year decline in the value of new mortgage lending indicate a household sector that has begun to respond positively to sharp interest rate cuts. This is good news because almost all the banks have now announced a relaxation in mortgage lending, which bodes well for the property sector.

Standard Bank recently increased its risk acceptance rate in its home loan and credit card divisions. The changes were designed to benefit first-time entrants to the housing and general credit markets.

“It is important that we support and provide access to finance to the lower end of the economic spectrum. People in this sector have been hardest hit by higher inflation, job losses and the general slowdown in the economy. Standard Bank is committed to providing access to finance and financial services to the lowincome market, while continuing to focus on prudent risk, capital and liquidity management,” says Standard Bank’s CEO for personal and business banking SA, Peter Schlebusch.

Absa is now prepared to give 110% bonds to the low end of the market (houses worth R250000 or less). But the middle sector, with houses from R500000 to R1,5m, will have to put in at least 5% to 10% equity in their mortgages. First National Bank (FNB) is also providing up to 95% bonds, with other banks likely to follow suit.

FNB property strategist John Loos says the mildly diminished rate of year-on-year decline in the value of new mortgage lending indicates a household sector that has begun to respond to sharp interest rate cuts. He says moderate strengthening in growth rates is expected to follow.

Loos says that in the coming quarters, new mortgage value growth is expected to rely increasingly on a stronger economy, with the Bank’s leading indicator having started to point the way up, and such mild improvement is expected to lead the FNB house price index out of deflation next year.

The Reserve Bank quarterly bulletin for this month shows that for the second quarter as a whole, the year-on-year rate of decline in new mortgage loans and re-advances looked slightly better. These recorded a 49,3% year-on-year fall, compared to 57,5% for the first quarter.

Looking at the figures month by month, however, the improvement appeared to be more impressive towards the end of the second quarter, with the June year-on-year decline far less at 27,3%. The second-quarter total of R35,718bn worth of loans granted was 1% up on the first quarter, on a quarter-on-quarter basis.

“While one cannot draw hard and fast conclusions about a trend change based on one quarter, it is believed that the second-quarter number represents a mild turn for the better as a result of the sharp drop in interest rates and an economic growth rate that looks set to emerge slowly from recession, along with mild relaxation of credit criteria by certain banks.”

The Bank composite leading business cycle indicator began to turn the corner in the second quarter, indicating that the rate of growth in new residential mortgage loans granted tracks the leading indicator.

Taking a look at mortgage loans paid out — bearing in mind that there is a non-residential component in the number — the year-on-year rate of decline also remains extreme.

The 61,7% decline in the second quarter was slightly less than the first quarter’s 66,4%, and by June the year-on-year rate of decline had diminished further to 53,7%.

“While the picture certainly still remains extremely weak, there are signs that we may be slowly turning the corner after a huge pullback on mortgage and overall household borrowing,” says Loos.

On the capital repayments side, it is encouraging that the Bank reports a significantly smaller year-on-year rate of decline in capital repayments on mortgage loans, to the tune of 33,1% in the second quarter, compared with a massive 74,6% decline in the first quarter year on year.

For the month of June, the year-on-year decline in the value of capital repayments was a mere 12,3%, and quarter on quarter the value of capital repayments was 59,4% higher in the second quarter.

“This may be an early sign of things to come in terms of a more rapid paying down of total mortgage debt outstanding in the coming months,” says Loos.