There is safe financing space to utilise the equity in property
It is amazing how the banking narrative has switched around in a mere eight months. Whereas in September last year we were still enticed daily with the merits of all kinds of financing options, the new flavour of the month is one of save, save, save. As if the ordinary Namibian is responsible for the inevitable crunch that were to follow seven years of extravagant government borrowing and spending.
It is also mildly funny when your personal bank advises you to make use of the equity in your property but then retracts this statement a day later, describing a home loan as “low-cost borrowing.” If that is the case, then I beg you, what is high-cost borrowing.
It was a welcome reprieve to hear earlier this week, the Monetary Policy Committee of the Bank of Namibia has decided to keep the repo rate on hold at 7%. This, by agreement with the banks, translates to a prime lending rate of 10.75%. But interestingly enough, the Bank of Namibia used to advertise the mortgage rate on their website but has in the meantime discontinued it. That information has to be supplied by the commercial banks themselves. It turns out, the mortgage rate on existing home loans is still higher than prime, coming in at 11.75%.
It is in the arena of property finance where I believe the biggest opportunity lies to reduce the financial burden on both companies and home owners. When the Bank of Namibia started pressuring the commercial banks some ten years ago to accept a lesser spread between repo and prime, the higher mortgage rate was offered as compensation. That was when there were only four commercial banks, and before the property bubble started and then blew out of all proportions.
Banks typically see property as the most secured form of lending to households and to private companies. Property is excellent collateral and in the case of a default, there is a reasonable expectation that the bank, as a bonded lender, will receive its money first. This is solid, everyday economics. However, if property valuations are inflated, any bank needs to keep an eye on the condition of the property market. Furthermore, when mortgages make up between 40% and 50% of a bank’s balance sheet, then there are definite signs of increased risk despite the central bank’s repeated assurance, mortgages pose no problem to the capitalisation of commercial banks.
If this is so, then why is the mortgage rate not lower than the prime rate? After all, property is such good collateral, the lending risk must be considerably smaller creating space for a lower mortgage rate. It is at this point that the penny drops.
There are simply too many households and businesses who are borrowed to the hilt on their properties. The first confirmation for this observation comes from the fact that the mortgage rate is now only 1 percentage point higher than the prime rate. In the past, this differential was bigger. The second confirmation comes from developments in the property market itself, where banks now reserve the option to set higher (or even lower) mortgage rates for new loans.
At a prime rate of 10.75%, the Namibian economy is bordering an interest rate regime that can only be described as punitive. I believe the South Africans has cottoned on to this, hence the reason why they kept their repo rate also at 7% a fortnight ago. As we are always reminded, the Bank of Namibia has to remain aligned with interest rates in the region, which is a nice, polite way of saying, interest rates are determined by South Africa and everybody else has to follow suit, Schuss Klaar!
It was noticeable in this week’s MPC announcement that the threat of capital leaving Namibia for South Africa was again mentioned, but downplayed considerably. I think we are way beyond the point where money slips to South Africa simply because the interest rate their compensates savers more. One does not need to be a statistician to see Namibian risks are not an inch more than South African risks. So, for the time being, I hope we remain on par with South Africa.
However, this is the big conundrum. The South African economy is huge but it is not sound. The only real reason for the current punitive rates and for the thrashed currency, is the growing deficit on the South African current account. It is not consumer spending and it is not Private Sector Credit Extension. We are the hostages of their economic mismanagement.
Graphs supplied by the Statistics Agency this week show clearly the link between interest rates and inflation, and if my observation is correct, higher interest rates push inflation up, not reduce it.