New mortgages decline as interest rates rise

New mortgage data from the South African Reserve Bank (SARB) for the fourth quarter of 2021 confirmed the sharp deceleration in growth from the previous two quarters and the start of a slight year-on-year decline. the other of the value of the new mortgage loans granted.

The SARB quarterly bulletin published in March 2022 showed that the growth rate of the total value of new Mortgages slowed sharply to -0.56% in the third quarter of 2021, after a massive growth peak of +109.7% year-on-year in the second quarter. It then moved slightly into negative territory at -0.506% year on year in the last 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 weak base effect created by the sharp economic downturn in the second quarter of 2020.

“After that, the 2020 basis rose rapidly due to the easing of lockdown conditions and very low prevailing interest rates following the sharp SARB rate cuts at the start of 2020. These cuts have fueled an increase – particularly in new demand for residential mortgages in the second half of 2020.

“The slight year-over-year decline in the last two quarters of 2021 reflects higher base effects created at the end of 2020, a lack of additional interest rate stimulus after the rate cuts in 2020. early 2020, then late 2021, the start of the SARB cycle of rising interest rates as CPI inflation became more of a nuisance.

Commercial Mortgages

Loos says the large sub-component of new residential mortgages is generally the main influence on the direction of the value of total new mortgages originated due to its relative size.

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

“However, the value of new commercial mortgage originations declined more significantly -6.43% year-on-year in the last 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 further slowdown in residential mortgage growth makes a lot of sense. Residential mortgage demand is generally more sensitive to interest rate fluctuations than commercial demand. This category grew very sharply in the latter stages of 2020 after the easing of tough lockdown restrictions. Homebuyers reacted strongly to the sharp SARB interest rate cuts that took place just before these closings. This meant that the opposite was starting to happen in the second half of 2021. New demand for mortgages began to decline due to a lack of further interest rate stimulus.

“The decline in new commercial mortgage originations in the fourth quarter seems less easily explained by economic factors. However, this is likely because this category is much smaller than residential and more volatile from quarter to quarter.

“The commercial real estate sector is influenced more by economic growth trends and less by interest rates than the residential sector. Therefore, we expect some growth momentum to remain in new commercial mortgages despite rising interest rates.

“Certainly the latest ETF survey of real estate brokers highlighted the continued increase in sales activity across all three major commercial property categories – industrial, retail and office – through 2021 and into early 2022. The FNB survey of real estate agents, on the other hand, showed residential sales activity was already down from its highs after the hard lockdown.

Not unexpected

Loos says the slowdown in new mortgage growth has been entirely in line with expectations.

“The slowdown resulted from a much higher base created in particular by the surge in residential demand in the second half of 2021. But, then, the lack of further interest rate hikes since the start of 2020 led to the depletion of demand stimulation.

“More recently, the start of the interest rate hike since late November 2021 – with three 25 basis point increases so far – is expected to lead to a further decline in residential mortgage lending. However, despite falling by a year-over-year for commercial mortgages in the fourth quarter, we expect further modest positive growth in this category at least in the first half of 2022. After that, another predicted rate hike is likely to wreak havoc. of real estate brokers continue to indicate an acceleration of sales activity in the commercial real estate market.

Writer: Sarah Jane Meyer

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