Property Talk

Author: Andreas Wassenaar
Date: 2016-07-29

If you are a bank and your business is lending money, then the predictability of the performance of your clients in being able to adequately service the debt finance you provide is of particular interest. Similarly if you are in real estate that depends to a large extent on mortgage finance to fuel sales, you would like to know in advance when the performance on servicing mortgage bonds in the market may change and what key drivers of this behavior may be out there in order to carefully track in order to stay one step ahead of the game. Commercial banks have spent a lot of time and effort researching these aspects of debt markets and FNB's recently published Mortgage Barometer Report analyses the data in order to provide a prediction of what can be expected over the next two years.

The price of money or the prime interest rate is the first of our key drivers.

Since 19th July 2012 our prime rate cycle has been upward and since then rates have increased from 8,5% to the current 10,5%. Over this same period our CPI inflation rate has moved from 5,5% to 6,1% in a relatively flat sideways movement. The windfall from a low crude oil price has to some extent been offset by a collapse in our Rand exchange rate. Weak demand in general has been felt in the vehicle sales and retail sales sectors this year. FNB's forecast on non-performing mortgage loans currently points to further weakness over the next two years. They feel that the past interest rate hikes still have a lagged effect on our debt market. The reason they say this is because a key leading indicator of non-performing loans is currently indicating the typical warning signals seen before. Much of the study of economics has to do with the study of the cyclical nature of demand, supply and prices. The best single "macro-predictor" of Residential Mortgage Arrears, according to FNB, is the Household Sector Debt-Service Ratio. This useful statistic indicates the total interest paid on all outstanding household sector debt, expressed as a ratio of household disposable income. Simply put, out of every Rand of disposable income you have as a household, the percentage, which is allocated to servicing your total debt as a household. In general as the household debt service ratio decreases, either by lower levels of debt or higher disposable income, or a combination of these, the households performance in servicing their debt improves. This can be measured accurately in terms of the number of insolvencies recorded, which drops accordingly. However when the household debt-service ratio increases, insolvencies soon track this increase upwards. What the banks are currently looking at is an increasing Debt-Service Ratio. From late-2013 it has increased from 8,5 to 9,7 by the 1st quarter of 2016. It is this change of direction that has alerted the banks to an expected increase in the number of non-performing mortgage loans on their books. Non-performing loans are defined as those that are 90 days or more in arrears. The debt-service ratio bottomed in 2013, and with a lag of two years the level of non-performing loans similarly bottomed in 2015 at 3,4% of the value of total mortgage loans. The current forecast provided by FNB is that this figure will peak at 4,7% in 2018. Prime interest rates are forecast to peak at 10,75% later this year, with the Debt-Service Ratio going to 10%. The good news is that the forecast 4,7% high in non-performing loans represents a relatively modest outcome when compared to the 2010 peak of 9,2% following the peak in the Debt-Service Ration in 2008 at the height of the global financial crisis.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com

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