Reckless lending concerns property market

Johannesburg - South Africa should look to the lessons of the US housing correction to avoid poor lending practices locally from knocking economic growth and stability, according to market analysts.

"While South Africa has been applauded for having one of the most sound and transparent banking systems around the world, it can be criticised for the less prudent lending practices banks have adopted lately," analysts at Econometrix Treasury Management (ETM) said on Tuesday.

"South Africa will not want to introduce a potential source of macroeconomic volatility after it has made so much progress in enhancing the general stability of the domestic economy," they pointed out.

"Although the correction in the US property sector is a lot more severe than the muted slowdown in growth experienced locally, the US still provides a great example of how reckless lending practices and a substantial subprime mortgage market could impact on growth and economic stability," they added.

Subprime mortgages are usually granted to those with bad credit history, thus demanding a higher interest rate to compensate for the added risk premium.

According to Absa, the country's biggest mortgage lender, house price growth is expected to level off later this year to 10 percent year on year - which is still down significantly from 30 percent experienced in 2004.

"Clearly the banks are feeling a little uncomfortable with the amount of credit that they have extended, as we see increasing amounts of debt being securitised and sold off," ETM pointed out.

ETM further warned that slower house growth could have a "considerable implication" on the growth of the South African economy, as it would mean a reduction in fixed investment and employment in the construction sector.

Drawing on the property correction in the US, ETM said: "In the same way the property boom in the US boosted the wealth effect and overall consumption demand, SA's growth was equally well supported. A slump or even reduced growth in the housing market will have considerable implication on the outlook for future growth in both economies."

Article by: Tiisetso Motsoeneng - www.busrep.co.za