Straining the Resources of South Africa’s Mortgage Holders
by Jennifer Lewis
The latest review of interest rates by the South Africa Reserve Bank (SARB), which was announced on 20 November 2014, left the key repo rate, which was raised cumulatively by 75 points over the year, unchanged at 5.75%. This had been expected against a backdrop of continued economic weakness and a lowered inflation trajectory. For much of 2014, the inflation rate has stayed above SARB’s target figure of 3-6%. SARB had stated in October that although the rise in value of financial assets had resulted in a sharp increase in household wealth, consumers were still vulnerable to a sluggish economy that was expected to have grown by only a modest 1.4% over the year. The current economic situation contrasts with the confident picture painted in early 2013, when the 2012 last quarter results showed a recovery from a shaky third quarter, and South Africa was ranked in the Grant Thornton Emerging Economies Report as Africa’s leading economy.
Responding to market pressures
On the current economic situation, Nedbank’s head of home loan sales, Timothy Akinnusi, said in October that the strain put on customers was “starting to reflect in terms of their ability to make repayments in a consistent manner.” This was true throughout the mortgage lending sector. He added that although the South African mortgage market overall was not showing an increase in defaults and repossessions, more clients were succumbing to caution and selling their homes in the expectation that they would not be able to keep up their monthly payments. The increasing cost of living and rising interest rates are forcing people to face the necessity of recalculating what they could safely afford to pay and to look at downsizing in order to guarantee their future security. Nedbank, which is a subsidiary of the UK-listed insurance company, Old Mutual, has seen a similar scenario in the UK mortgage market following the 2009 recession, which has also resulted in its 120 billion rand South African mortgage book showing 5% non-performing loans.
Inhibited economic expansion resulting from necessary structural constraints by the government following a period marred by strikes in the manufacturing and mining sectors, a weakening rand exchange rate and the prospect of future wage settlements that exceed the inflation rate have all helped to introduce this cautionary note into the mortgage market. Although Nedbank has a market share of only about 15%, its reaction to the changing climate should help to stabilise the market by increasing the confidence of hard-pressed existing mortgage customers. On the one hand, the bank has turned away from using third party financial service companies and offer most of its new loans in-house; on the other, it is now offering new mortgage customers same-day credit approval if they apply online. So far this year, only 13% of new loan applications have been made online, but Nedbank is not looking to expand its business at any cost and is concentrating for the time being only on high end customers, anticipating only a slowly recovering market over the coming year.
Mortgage Rates must rise eventually
After the 20 November SARB Monetary Policy Committee (MPC) meeting, governor Lesetja Kganyago stated that future repo rate rises would depend on the health of the local economy as well as on the speed of U.S. interest rate rises. He said that although the outlook for growth remained challenging, the MPC did not see any significant signs that the pressure of excessive demand would impact on the inflation rate in the coming months, but that SARB would carefully monitor economic developments. However, the governor said that the committee viewed the current interest rates as low and that they would need to be normalised over time. While before the meeting most economists thought that interest rates would remain unchanged, some expected this SARB final policy meeting of the year to raise them by 25 base points on top of the 75 points seen earlier in 2014. However, it was reported that all six members of the committee had been unanimous in holding them steady.
In South Africa, the long-term prognosis of decline in the mining and manufacturing sectors and growing consumer debt may be something the banks can manage, but it will leave its mark on the economy. SARB’s twin aims of sustaining economic growth while maintaining stability of prices will best be assisted by working to move funding away from the support of unsustainable consumption and instead to develop policies for improving competitiveness and productivity.