Property Talk

Do you remember the global financial crisis of 2008 and resulting recession of 2009 The eight years since then has thought us a thing or two. A fascinating analysis done recently by FNB entailed creating a hypothetical economic model simulation of a 2008-style economic shock to determine the likely impact on bad debt levels and the fallout that would typically result.

Although such a scenario is not necessarily expected, the nature of an economic "shock" is that it is never expected and does take most people by surprise. Economic growth for 2017 is forecast at 1%, up from the dismal 0.2% final expected rate for 2016.

Average House Price growth is expected to be 5,1% for 2016 and 3% for 2017. The mortgage market as measured by transaction volumes is expected to end -6,3% lower in 2016 and a further -2% decline is expected in 2017. Non-performing mortgage loans are classified as those in arrears for longer than 3 months. The good news is that despite the residential mortgage market being weak in terms of transaction growth, it is actually solid in terms of the debt repayment performance according to the FNB report.

This report confirms that the residential mortgage market vulnerability to economic and interest rate shocks have been greatly reduced through a significant reduction in the level of household sector indebtedness since 2008. All indications are that the SA Reserve Bank is done with its current cycle of interest rate hiking and that the prime rate will remain at its current 10,5% through 2017 and 2018. However economic growth of only 1% is not sufficient to inspire positive change in the mortgage market.

When in 2007 the National Credit Act came into being, the immediate impact on the property market was relatively severe but the impact was to create a soft landing of sorts for the SA market. When the global financial crisis took effect, we were already responding to dramatic changes in demand and the adjustment in household indebtedness essentially resulted in households strengthening their balance sheets.

The household sector debt-to-disposable income ratio has declined from a peak of 87.8% in early 2008 to 75.1% in the 2nd quarter of 2016. The FNB "Shock Model Scenario" took oil prices back up to US$150/barrel, assumed a major global food price inflation shock, and a Rand depreciation significantly more severe than the current forecast. On top of this a global economic recession was assumed. Sounds like the perfect storm.

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