Property Talk

Author: Andreas Wassenaar
Date: 2016-08-19

An interesting change has occurred over the last twenty years in the mortgage market when we consider the mortgage loan-to-value ratios. This was recently analysed by FNB and their findings published in their property barometer report. Historically it was noted that as soon as the interest rate cycle direction changed and interest rates started to increase, the mortgage lenders would immediately adjust their credit criteria to tighten up on the level of mortgage finance provider on a home relative to its value. The loan-to-value levels would therefore immediately decrease as interest rates increased. However more recently it has been noted that despite interest rates moving upwards the level of mortgage finance relative to the value of a home has remained relatively stable. The obvious question is therefore why this is the case and to explore reasons as to what has fundamentally changed. To access an accurate proxy for home valuations, FNB looked at the average loan-to-purchase price ratio using deeds office data from as far back as 1996. The mortgage provider has the aim to limit the risk of a mortgaged home ending up with a value lower than the money owed on it, as the home is the security backing to the mortgage loan. As much as homeowners do not want to be in this "negative equity" position, the banks equally want to try and avoid this scenario at all costs.

As the property boom period of 2005 to 2007 came to an end when the global financial crisis gripped financial and property markets in 2008, the house price index was decreasing substantially well in advance of the adjustment by the banks in their loan to price criteria. In fact looking back at the actual stats we see that the steady slowing of the average house price growth actually began in the 1st quarter of 2005, after an almost unbelievable growth peak of 37.4% reached at the end of 2004. This trend decreased to the low point of price deflation of -6,7% as at the 2nd quarter of 2009. For those astute property investors at the time the writing was on the wall during the full course of 2005 and 2006, making it relatively easy for them to offload properties while the buying frenzy was still going on and the banks were still providing high loan to price mortgages. It was only in late 2008 that the response from the mortgage lending sector came with a dramatic drop in their average loan to price ratio to 85.76% from the 93,73% seen at the end of 2007. So when they eventually reacted, it happened very quickly and very intensely. This would have been a rude awakening for many purchasers looking to secure mortgage finance on a property transaction at the time. The banks would in a matter of months completely amend their loan-to-price financing criteria.

If we now consider what has happened since 2014 when the interest rate cycle started to increase again, we notice little to no change in the average loan-to-price levels. An explanation provided by FNB is that the banks are concerned less by rising interest rates than by increases in mortgage arrears, and over the past two years the arrears figures have been stable. In addition to this the way in which the SARB approach interest rate setting seems to have changed significantly over the past two decades. The SARB nowadays follows a clear mandate to use interest rates as a policy instrument to control consumer price inflation to within the 3% - 6% target range, rather than trying to use it to defend weakness in the Rand exchange rate. The SARB also now has Monetary Policy Committee meetings every two months which are widely broadcast and reported on and the detailed statement of the Reserve Bank Governor published on their website. This is a level of transparency that was not evident in the 1990's and provides a level of predictability and certainty on the trend direction and level of interest rate changes that was not previously provided.

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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