The residential mortgage market is weak in terms of transaction growth, but solid in terms of debt repayment performance under weak economic circumstances, says FNB.
Most of the recent indications have been that the market has been slowing down in terms of volume and value of new lending, with little or no real growth to speak of, it said.
So what does this mean looking forward? “We are not projecting any major change to this situation,” said John Loos, household and property sector strategist at FNB.
The group’s forecast is for slightly improved economic growth in 2017 of 1%, from an expected 0.2% rate for the entire 2016.
“That mildly improved expectation is on the back of the belief that the SARB (SA Reserve Bank) is done with interest rate hiking for the time being, and will keep interest rates at current levels, where Prime Rate is 10.5%, through 2017 and 2018,” Loos said.
FNB also expects drought conditions to ease, while signs of some mild global economic turnaround could also be mildly more supportive of our domestic economy next year.
Average house price growth is forecast at 3% for 2017, after an expected 5.1% average for 2016, FNB said.
“That should not be too surprising, given that interest rates have risen mildly in recent years, and the country’s economic growth rate hovers not far from zero, constraining employment and income growth for households,” Loos said.
Only in 2018 does FNB project a slight strengthening in the annual average price growth rate to 4.7%, should mildly improved economic forecasts hold.
In both 2017 and 2018, such average house price forecasts would translate into house price decline in real terms.
In terms of mortgage market transaction volumes, FNB projects a -2% decline in 2017, with growth in the bonded component of property transactions only returning to positive growth in 2018.
Growth in the average value per bonded property transaction by individuals is forecast to slow to as low as 1% for 2017, contained by a financially constrained household sector, the financial services company said.
FNB said that the market continues to perform well, under the poor economic circumstances, in terms of the level of mortgage debt repayment performance.
The local market has seen a healthy decline in the value of household sector mortgage loans as a percentage of household sector disposable income, from a 49.2% all-time high early in 2008 to 34.7% by the 2nd quarter of 2016.
FNB noted that the household sector debt-to-disposable income ratio has also declined substantially, from an 87.8% high in early-2008 to 75.1% in the 2nd quarter of 2016.
“This improvement in the level of household indebtedness, greatly lowering household sector vulnerability, has been the key factor helping mortgage debt repayment performance to remain at relatively low levels, to date, through the most recent period of economic weakness and interest rate hiking,” it said.
In addition, the magnitude of interest rate hiking has not yet been extreme, and interest rates remain relatively low even despite the hikes to date.