New mortgages decline as interest rate increases hit

The value of new mortgage loans granted declined in the final quarter of 2021, as the market feels the effects of a lack of new interest rate stimulus.

The South African Reserve Bank’s (SARB) new mortgage lending data for the fourth quarter of 2021 confirmed the sharp deceleration in growth from the two previous quarters and the onset of a slight year on year drop in the value of new mortgage loans granted.

The SARB Quarterly Bulletin released in March 2022 showed that the growth rate in the total value of new mortgage loans granted slowed sharply to a negative -0.56% in the third quarter of 2021, from a massive +109.7% year on year growth spike in the second quarter. It then moved slightly further into negative territory at -0.506% year on year in the final quarter of 2021.

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John Loos, Property Sector Strategist at FNB Commercial Property Finance, says the massive spike in the second quarter of 2021 was mainly due to a low base effect created by the hard lockdown of the economy in the second quarter of 2020.

“After that, the 2020 base rapidly increased due to the easing lockdown conditions and very low prevailing interest rates following the sharp SARB rate cuts in early 2020. Those cuts fuelled a surge – especially in new residential mortgage demand in the second half of 2020.

“The mild year on year declines in the final two quarters of 2021 reflected higher base effects created late in 2020, a lack of further interest rate stimulus following the early-2020 interest rate cuts, and then late in 2021, the onset of the SARB interest rate hiking cycle as CPI inflation became more troublesome.”

Commercial mortgage loans

Loos says the large new residential mortgage sub-component is usually the key influence on the direction of the value of total new mortgage loans granted due to its sheer relative size.

“And indeed, the growth in value of new residential mortgage loans granted has slowed from a 135.30% year on year growth peak in the second quarter of 2021 to record slightly -2.64% and -1.58% year on year declines in the third and fourth quarters of 2021,” he says.

“However, the value of new commercial mortgage loans granted declined by a more significant -6.43% year on year in the final quarter of 2021. This was after its growth rate slowed from 51.97% in the second quarter and 8.5% in the third quarter of 2021.”

He says the new residential mortgage growth slowdown makes a lot of sense. Residential mortgage demand is typically more sensitive to interest rate movements than commercial demand. This category grew very strongly in the latter stages of 2020 after hard lockdown restrictions eased. Home buyers responded strongly to the sharp SARB interest rate cuts that took place just before those lockdowns. This meant that the opposite was beginning to happen by the second half of 2021. New mortgage demand started to decline because of a lack of further interest rate stimulus.

“The fourth quarter drop in new commercial mortgage loans granted seems less easy to explain by economic factors. However, it is probably because this category is far smaller than residential and more volatile from one quarter to the next.

“The commercial property sector is more influenced by economic growth trends and less by interest rates than residential. Therefore, we expect there is still some growth momentum left in new commercial mortgage lending despite interest rate hiking.

“Certainly, the latest FNB Property Broker Survey pointed to the ongoing increase in sales activity in all three major commercial property classes – industrial, retail and office – through 2021 and early in 2022. FNB’s Estate Agent Survey, on the other hand, showed that residential sales activity was already down from its post hard-lockdown highs.”

Not unexpected

Loos says the slowdown in new mortgage lending growth was very much as expected.

“The slowdown resulted from a far higher base being created by especially the residential demand surge in the latter half of 2021. But, then, a lack of further interest rate hiking since early 2020 caused the demand stimulus to wear thin.

“More recently, the start of interest rate hiking since late November 2021 – with three 25 basis points increases so far – can be expected to cause a further drop in residential mortgages. However, despite a year-on-year decline in the commercial mortgages in the fourth quarter, we expect some further slight positive growth in this category in at least the first half of 2022. After this, further expected rate hiking will probably take its toll. Recent FNB Property Broker Surveys still point to accelerating sales activity in the commercial property market.”

Writer : Sarah-Jane Meyer

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