Ethel Hazelhurst for Business Report on IOL reports:

“Johannesburg – While the residential property market is still ticking over steadily, the value of non-performing mortgage loans rose sharply in the first four months of the year.

Figures released yesterday by the banking supervision department show an increase from R6.1 billion in December 2005 and R6.9 billion a year later to R8.4 billion by the end of April.

As a ratio of total mortgage books, the figure is still small, 1.14 percent from 1.08 percent in December. Standard Bank economist Elna Moolman said that in 2001 it was over 6 percent. The ratio retreated as house prices started rising across the board.

But banking registrar Errol Kruger pointed out that ratios can mask a problem.

“There are two components to a ratio. And, as long as the total book grows at a strong rate, the ratio tends to stay low,” he said.

But sanctions against reckless lending and the restrictions on the marketing of credit, following the implementation of the National Credit Act this month, are likely to slow growth in lending. At the same time, the impact of a 2.5 percent increase in mortgage rates, to 13 percent, is likely to increase the incidence of bad debt.

So he predicted that the ratio would deteriorate. “It doesn’t pose a systemic risk. It’s a normal part of the interest rate cycle and it’s not as if banks haven’t been managing risk,” he said. “But it is affecting individuals adversely.”

As homeowners start to make distress sales and banks increase repossessions, the increasing supply of properties coming on to the market will slow price growth further, with economic implications.

Rising house prices have funded the consumer boom, because households have used comparatively cheap mortgage finance to fund consumption. “They repay it over 20 years but spend it in one year,” Kruger remarked last year, when the issue of rising household debt first caused concern.

Households’ credit-fuelled consumption spree sent profits of retailers, motor manufacturers and banks, among others, soaring. The process helped push gross domestic product growth to around 5 percent for each of the past three years.

Now the interest rate cycle has turned and those sectors will see lower profits. And, unless capital expenditure compensates for reduced consumer spending, the economy may rise more slowly this year and next.

The market is obviously a long way from the crises that arose in the mid-1980s and the end of the 1990s, when interest rates rose well over 20 percent and sent property prices tumbling.

Absa property economist Jacques du Toit predicted that house prices this year will grow at between 13 percent and 14 percent. “The most recent figure is 15.5 percent year on year growth in May,” he said.

The average Absa house price is around R900 000, based on its mortgage book. Standard Bank’s average price was R600 000 in May, based on deeds office figures.”