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There’s little chance for further development and expansion of South Africa’s mature mortgage market, according to research by Moody’s Investor Service.
The ratings agency on Monday released a report on the rising middle class in emerging markets and how they would support growth of mortgage markets.
Antonio Tena, vice president and senior analyst at Moody’s, explained in the report that compared to other emerging markets, South Africa’s mortgage market is the most developed. It is driven by sophisticated domestic financial markets and a sufficiently capitalised banking sector.
SA’s mortgage debt to GDP ratio is at 20%, which is significantly higher than the rest of emerging market economies, and close to that of developed mortgage markets such as those in Eastern Europe.
Further, domestic borrowers have historically high levels of indebtedness, which makes it difficult for "significant credit expansion".
"With the exception of South Africa, all countries, especially Russia and Turkey, show good affordability indicators, with low starting points in the range of 5% to 10% of mortgage debt over GDP," Tena said in a statement on the report.
Limited middle class expansion is a key obstacle to SA’s mortgage market growth. Middle class development is stagnant because of a historically weak labour market, with limited opportunities, especially in the private sector, according to the report.
Another stumbling block to growth in the market is low levels of entrepreneurship by the population. "The working population have limited incentives to invest in skills demanded in the jobs market. In turn, the employment focus in low productivity jobs and firms, further limiting middle class development," the report read.
Further, South Africa's emerging middle class has been less marked in recent years, compared to other emerging countries. "The Southern African Labour and Development Research Unit at the University of Cape Town quantified the middle class at 22% in 2015, a very limited improvement from 20% in 2008," the report cited.
Moody’s also flagged economic weaknesses. GDP growth is expected to rise to 1.4% in 2018, from 1.3% in 2017. However, real GDP growth must exceed population growth (1.6% as at 2016) on a sustainable basis, the report read.
"While our economic growth projections are still very close to the population growth rate, living standards will on average remain broadly unchanged.
"Subdued economic growth will continue to pose challenges to the government's goal of reducing persistently high unemployment, especially among the nation's youth population."
Moody’s also noted that despite room for growth in the mortgage market, there was still strong performance of current mortgages. The 90+ days arrears rate is below 2% on outstanding portfolio balances.
This is mainly due to prudent underwriting criteria of the mortgage market, as well as low loan-to-value ratios at an average of 50% - and even lower when taking into account the inflation effect of housing prices. There are extremely low levels for mortgages of losses ranging between 5 to 10 basis points and high recovery rates.
