Faced with a higher share of non-performing loans, banks tightened lending criteria, dampening the stimulative effect of lower central bank policy rates. As asset prices adjusted to more realistic levels, the implied negative wealth effect reigned in consumption and banks’ appetite for lending. The gradual reduction of excess housing inventories delayed any recovery in residential construction.
We did observe these developments in South Africa, even though the pre-2008 degree of private-sector leveraging had fallen short of what was seen in many developed economies, and as a result, the adjustment required was somewhat less brutal.