Analysing Mortgage Loan-to-Value Ratio

PROPERTY BAROMETER DOES A MORE “GRADUALIST” SARB MEAN A DIFFERENT APPROACH BY MORTGAGE LENDERS?
Analysing Mortgage Loan-to-Value Ratios, it appears that the Mortgage Market is less responsive to the commencement of interest rate hiking these days, compared to earlier years
In the Housing Market, both the mortgage lending institutions and the mortgage borrowers alike have long been known for their “pro-cyclical” behavior, lending/borrowing more when interest rates are low and becoming more conservative in their approach when interest rate rise.
But in more recent years, a very different SARB (South African Reserve Bank) compared to the 1990s may have encouraged the Residential Mortgage Market to take longer in its response to key cyclical changes, not responding immediately to interest rate hiking when it starts but only later when rising “mortgage stress” starts to set in.
THE AVERAGE LOAN-TO-PURCHASE PRICE RATIO’S REPONSE TO INTEREST RATE MOVES HAS CHANGED
In this note, we consider movements in the Average Loan-to-Purchase Price (LTP) Ratio since the late-1990s. The LTP is admittedly an indicator of only one area of mortgage lenders’ credit policy, namely their so called “Loan-to-Value” (LTV) policy in which they impose various limits on the value of mortgage loans relative to the valuation of
the homes on which the loans are being applied for, the LTV being determined by a number of risk criteria.
Periodically, as lenders’ perceptions of lending risk change, due to changes in the market or economic environment, these LTV limits can be adjusted deliberately to safeguard borrower and lender alike. The normal aim is to limit the risk of a mortgaged home ending up with a value lower than the money owed on it, because the
home is the security backing the mortgage loan. This would suggest that the market average LTV, and our Deeds data calculated proxy “LTP”, could possibly be
expected to shift as the market average house price shifts.
Is this the case?
Using our own FNB Long Term House Price Index (compiled from Deeds data), and our Deeds data-calculated Average Loan-to-Purchase Price (LTP) for
bonded properties purchased by individuals (“Natural Persons”), we don’t find conclusive evidence of the mortgage market following
average house price growth trends closely. Around 1998/9, there was a dip in house price inflation, ultimately into slight deflation, which
did co-incide with a significant dip in Average LTP. However, the Average Estimated LTP drop from 0.933 in the 1st quarter of 2002 to 0.874 by the
1st quarter of 2003 was also a marked one, and came at a time when there was no sign of any slowdown in house price inflation.
Then, the steady post-boom slowing in average house price growth began in the 1st quarter of 2005, after a lofty year-on-year growth peak of 37.4% reached at the end of 2004. This slowing growth trend continued all the way to a low point price deflation rate of -6.7% as at the 2nd quarter of 2009.
But the noticeable “response” from the mortgage lending sector, in terms of a drop in LTP, only arrived as late as 2008. From an average of 0.9373 at the end of 2007, the Average LTP plummeted to 0.8576 by the 2nd quarter of 2009, the big decline thus starting long after the house price indices had begun to point to Residential Market slowing.
So trend changes in national house price growth don’t appear to be a key driver of changes in average LTP.

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