Tighter credit standards darken outlook for houses
The leading business-cycle indicator continues to signal that even weaker economic activity should be expected, which bodes ill for the housing market.
The South African Reserve Bank’s (SARB) composite leading business-cycle indicator has been contracting (on a year-on-year basis) for more than two years, which — as the preceding graph implies — does not bode well for the growth in new residential mortgage loans granted. This is so because weaker prospects for economic growth, together with continued stubborn high household debt levels, might leave mortgagees (e.g. banks) with no choice but to be more stringent when it comes to the granting of loans. In fact, banks seem to have already tightened their standards for the approval of loans to households.
Compiled by the Bureau for Economic Research (BER) and sponsored by Ernst & Young, the credit standards survey qualitatively measures credit standards by surveying a panel of divisional heads at all the major retail banks. According to the compilers, credit standards refer to the terms of the loans and credit lines, such as maximum size, spread on loan rates over the banks’ cost of funds, premiums charged on riskier loans and collateral requirements. For each quarter the panel is asked to compare its credit standards for approving loans with standards in the same period a year earlier. Panellists are asked to state whether credit standards are ‘up’, ‘down’ or ‘the same’. To arrive at a net percentage balance, the percentage of respondents reporting ‘down’ is subtracted from the percentage reporting ‘up’.
As the graph below shows, the metric of credit standards has edged north in recent quarters, implying tighter credit standards with regard to the approval of loans. Given the general need for potential homebuyers to gear their purchases, tighter credit standards by banks will place a damper on the growth in house prices, given that when it comes to the granting of mortgage loans, tighter credit standards imply, inter alia, lower loan-to-value (LTV) ratios and higher interest-rate premiums.
Other factors that might over the short to medium term adversely affect affordability, the demand for houses and, consequently, the growth in prices, are:
• Rising interest rates (which directly impact on affordability)
• Soft employment conditions and slower growth in disposable incomes due to fewer appointments in the public sector and low salary adjustments in the private sector.
• Low levels of consumer confidence
Arguably, all the above factors are intertwined in that they all boil down to failing economic growth. A partial exception to this statement is the path of interest rates, which are, to a degree, determined by the Fed’s interest-rate policy, which is beyond SA’s control.
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