Easy Credit Bubble

Household debt, fuelled by unsecured debt such as credit cards, overdrafts and general loans, is beginning to pile up once more. This in turn may impact on banks’ lending criteria in terms of mortgage bonds.

The household debt ratio ie the balance of outstanding debt as a percentage of households’ annual disposable income, was 76.3% in the second quarter of this year – up from 75.6% in the first quarter. The cost of servicing debt has also risen, although moderately.

Reserve Bank data released at end-October shows that annual growth in the private sector edged up over 9%, boosted by a strong increase in unsecured lending. Low mortgage growth has seen the banks turning increasingly to other types of lending, particularly unsecured loans on which they charge higher interest. Many analysts fear that this type of debt – credit cards and retail accounts, for example, which do not have the underlying security of an asset – is getting out of hand. Investec economist Annabel Bishop estimates that if credit extended by retailers and other non-banking lenders were to be included in the overall quantum of unsecured lending, year-on- year growth was up by as much as 50%.

Standard Bank economist Shireen Darmalingam says unsecured bank lending to households rose 27.4% year-on-year last month. The big concern, and one which must be of great concern to the Reserve Bank, is that households are not taking sufficient advantage of the current low interest rates to pay off debt, but rather to borrow more.

According to the National Credit Regulator, up to 9.22 million credit-active consumers, or 47% of a total of 19,6 million, had impaired credit records in the second quarter. Comments Absa Bank; “This situation regarding credit records continues to significantly hamper consumers’ access to credit, and restricts consumption expenditure in the wake of the extremely low level of household savings.”

Job losses are adding to household woes. According to Statistics SA’s latest quarterly labour force survey, the unemployment rate is now 24.9%. More than half a million fewer people have jobs compared to four years ago. Consumer confidence, according to the Bureau for Economic Research, has also slipped.

In addition to this lack of confidence, says Standard Bank, “Consumers are faced with headwinds. Despite above-inflation salary increases enjoyed by most consumers combined with the lowest interest rates in decades, consumers are having to play catch-up. The basic reason for this is that the prices of basic goods are sky-rocketing, making it difficult for consumers to adjust their standard of living. For the poorest 30% of South Africans, the cost of the food basket as a share of average monthly income, increased to 38% (from 35% last year). Furthermore, increases in electricity and water continue to cut into consumers’ discretionary spending, while escalating indirect taxes, which include fuel taxes, increase the burden.”

Standard Bank’s Darmalingam said in September that the possibility of an interest rate cut has heightened. “We expect a 50 basis points cut at the Reserve Bank Monetary Policy Committee meeting in January,” she adds. That possibility may be fading.

While there has been a modest growth in house prices in recent months, there has been a rise in mortgage applications being turned down by the banks, who are now favouring higher deposits from applicants. Mortgage originator ooba’s CEO Saul Geffen, discloses that in September the average home loan deposit (in ooba’s books) rose by a massive 56.1%. “This is largely due to recent changes in banks’ lending policies favouring loans with at least 10% deposit,” he explains.

Growth in mortgage advances in general hovers around the 3% mark, and is not expected to show a significant improvement towards the end of the year, according to Absa.

Residential building activity has also slowed. According to Absa, building plans approved by local government fell 17.4% over the first half of the year. On the other hand, the construction of flats and townhouses was up 17.5% year-on-year, largely as a result of the very large number of plans approved for these types of housing last year.

Building costs continue to rise, although at a slower pace. Absa notes that it is 34.1% cheaper to buy an existing house than it is to build a new one.

Source: Pam Golding Properties Intellectual Property Magazine

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