immoafrica blog

Household Sector Borrowing

Is Household Sector borrowing becoming too aggressive too soon? Indebtedness needs to drop further, and savings needs to increase.

It was made known by the SARB (Reserve Bank), last month, that South Africa’s level of household indebtedness, as measured by the household debt-to-disposable income ratio, was 74.7% in the 1st quarter of 2012. Disappointing is the fact that this was only slightly down from 74.8% in the previous quarter. While the recent quarters’ levels are significantly lower than the 2008 historic peak of 82.7%, the level of indebtedness remains high by SA standards. Furthermore, the risk is that an apparent growing appetite for household borrowing, notably in the area of non-mortgage credit, may possibly be “prematurely” beginning to slow the much-needed progress in reducing the level of household sector indebtedness.

Should a recent gradual pick up in household credit growth be the start of a more sustainable trend, this should be of concern, because very low interest rates by SA’s historic standards have the ability to mask much of the household sector’s financial “fragility”, and much work remains to be done before the country’s household sector can be deemed to be financially healthy. The ultimate rise in interest rates, not expected just yet but sure to ultimately happen, is invariably where the “financially weak” will be found out.

Warren Buffet’s saying that “when the tide goes out we can see who has been swimming naked” is probably most appropriate here. For now, though, “the tide is still in”, and the household sector appears to feel that it is currently in a relatively good space, compared to the recession period of 2008/9. But a big part of this is due to very low interest rates as opposed to genuine improvements in underlying financial strength, and high indebtedness levels still persist.

The concern should be that the household sector risks entering the next interest rate hiking cycle with a still-high debt-to-disposable income ratio that could very quickly manifest itself in severe financial pain once more. The 1st quarter household sector debt-service ratio (the cost of servicing the household debt burden – interest + capital estimate – expressed as a percentage of disposable income) estimate of 11.4% was virtually unchanged from the previous quarter’s 11.4%, due to no further interest rate cutting, and a slowing in the pace of decline in the debt-to-disposable income ratio. If this is to be the bottom of the cycle for the debt-service ratio, it will be the highest bottom point on record, meaning that the household sector is more vulnerable to interest rate hikes than at previous cyclical bottom points.

Of concern, too perhaps, should be that non-mortgage household sector borrowing growth is near to 20% year-on-year, and rising. The desire to borrow and consume goes hand in hand with a very low propensity to save, and net household saving (gross saving adjusted for provision for depreciation on fixed assets) remained at zero percent of disposable income.

Given these household financial statistics, for the household sector to come out of the next interest rate hiking cycle without “significant pain”, the magnitude of those rate hikes would probably have to be significantly smaller than the last rate hiking cycle’s 5 percentage points’ worth of total increase. With current interest rates arguably at abnormally low levels by SA standards, that could be a hazardous assumption to make.

Household sector borrowing growth needs to remain sufficiently subdued so that disposable income growth can out-grow it for the next few years, and take the debt-to-disposable income ratio still lower, thereby providing a greater buffer against the next phase of interest rate hiking. Banks’ non-performing loans may well have improved (declined), aided by low interest rate relief.

But there still exists significant underlying financial weakness in the household sector, as perhaps illustrated by the FNB Estate Agent Survey, which still sees an estimated 20% of home sellers selling in order to downscale due to financial pressure. We should not be fooled by the effect of very low interest rates, and by a recently better-performing economy relative to 2008/9, into believing that we now have a financially strong household sector. Very significant household financial risks still exist. A few more years of household “balance sheet rebuilding”, including the lowering of the debt-to-disposable ratio and raising of the savings rate, is required first.

John Loos

Household and Property Sector Strategist

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