The macro-prudential policy in the form of loan-to-value (LTV) regulation, implemented in March this year, is likely to contribute to reduced concentration risk for commercial banks, as well as promote preferential access to housing for first-time buyers, Bank of Namibia (BoN) says.
This follows the gazetting of the LTV ratios for non-primary residential properties regulation on 26 September 2016.
The central bank also said the introduction of the LTV ratio is expected to reduce the concentration of high exposure to residential and commercial mortgage loans, which increased slightly in 2016 to 51,5 percent of the total loan book of domestic banking sector, compared with 51,3 percent in 2015.
It said total loans and advances increased from N$78,1 billion at the start of 2016, to N$85 billion at the end of the same year, representing an increase of nine percent.
The BoN said this measure will strengthen financial system stability, although it may not address the key underlying issues pertaining to the limited supply of houses and slow delivery of serviced land, so that it needed to be complemented with other measures.
The loan-to-value ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
The term is commonly used by banks and building societies to represent the ratio of the first mortgage line as a percentage of the total appraised value of real property.
Announcing the Namibia Financial Stability Report for April 2017, BoN Director for Research, Florette Nakusera, said for the macro-prudential policy to be successful there was a need to identify intermediate objectives, such as reducing excessive growth in credit, asset prices and leverage. Nakusera said other objectives also included reducing excessive lending and funding maturity mismatches; reducing direct and indirect concentrations of exposures to the same markets, products and institutions. She also noted the need to reduce moral hazards by avoiding situations where institutions increase their exposure to risk with the expectation that the government will bail them out.
“Macro-prudential instruments are policy tools that are intended to target the sources of systemic risk, such as liquidity and maturity mismatches, leverage or interconnectedness.
“A macro-prudential policy has two broad aims that are mutually compatible, namely; strengthening the resilience of the financial system to economic downturns and other adverse aggregate shocks; and leaning against the financial cycle to limit the accumulation of financial risks and the likelihood or the extent of a financial crisis.
“The recent evolution of Namibia’s house prices and rising mortgage loans raise questions as to whether or not the country is experiencing a housing bubble, which could be a significant source of systemic risk.
“A possible reversal of the prevailing house price trends, coupled with high household indebtedness, raises financial stability concerns due to banks’ high exposure to the real estate sector, particularly in the residential segment. This justifies the introduction of the LTV regulation.
“Namibia’s house prices have recorded sharp increases in recent years.
“The residential property price index compiled by FNB Namibia since 2007, shows that the average price of properties in the residential property segment increased from N$380,300 in 2009 to N$705,400 in 2014.
“This translates into an average annual rate of increase of 17.1 percent, outpacing the inflation rate that averaged 6.2 percent over the same period. Over a period of five years, residential property prices increased sharply by 85.5 percent.
“It may be noted that according to the price index mentioned above, average residential property prices increased by approximately 17 percent in 2015, tapering to about 13 percent in 2016, as demand softened,” she said.
Though the overall asset structure of the banking sector remained fairly unchanged during the period under review, according to the Namibia Financial Stability Report, mortgage lending remained dominant.
Commenting on the performance of the banking sector, Nakusera said “While the continuously high exposure to mortgage lending remained a concern, the introduction of the LTV ratio was expected to reduce this concentration.”
She noted that the sector slowed from double-digit rates previously, with cash and balances held by banks recording an increase of just more than nine percent from N$8 billion to N$8.8 billion during the period under review.