SA Mortgage Advances- Growth in mortgage advances moving sideways

According to data released by the Reserve Bank, year-on-year growth in mortgage advances by monetary institutions came to 23,2% year-on-year (y/y) in March 2008, compared with a growth rate of 23,1% recorded in February. This brought the total amount of mortgage advances to R882,1 billion in March. On a month-on-month basis, mortgage advances growth was somewhat lower at 1,2% in March February from 1,5% in February.

The household sector came under increased financial pressure in recent times with fuel prices rising to record highs on the back of high international oil prices and rand exchange rate movements, CPI food price inflation increasing to above 15% y/y last month, and interest rates which were hiked again earlier in April as a result of these inflationary pressures. The latest rate hike caused the average monthly mortgage repayment to increase by almost 32% in total since mid-2006 when interest rates have been raised by a cumulative 450 basis points. Inflation is forecast to remain under upward pressure over the short term, driven by food price inflation expected to remain relatively high and further likely fuel price increases in the pipeline. The average under-recovery on the petrol price for April to date is about 29 cents/litre, for wholesale diesel it is between 46 and 47c/l, and for illuminating paraffin it is 52 c/l. Expectations of inflation rising further may have a major impact on higher wage demands this year. Against this background, the Reserve Bank’s MPC is expected to raise interest rates by another 50 basis points in June. If this expectation holds true, it will take banks’ lending rates to a level of 15,5%.

In view of these developments, it may be possible that some consumers are borrowing in distress, especially those who have sufficient equity in their mortgage loans and who are still able to afford higher debt repayments. This might have caused mortgage advances growth to have remained static in March from February. Data compiled by the Reserve Bank indicates that growth in mortgage advances by the household sector has accelerated in recent months, underpinning the abovementioned view of distress borrowing over the short term.

Growth in mortgage advances is expected to taper off to well below 20% by end-2008, driven by the combined effect of deteriorating economic conditions and the National Credit Act.

Courtesy Jacques du Toit Senior Economist ABSA Bank

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