SARB (South African Reserve Bank) Household Sector Credit data for May continued to show benign growth. From a 3.3% year-on-year growth rate in April, the May rate declined slightly to 3.2%. This is arguably appropriate at the present time, given very slow growth in Household Sector Disposable Income.
This is the lowest rate since January 2010.
The mortgage credit category remains the key drag on overall credit growth due to both its sheer size as well as its very slow year-on-year growth rate of 2.7% as at May.
However, the slowdown is not only about mortgage credit’s sluggish growth. Total Household Sector Non-Mortgage Credit growth is slow itself these days, having measured 4.1% in both April and May, and now sharply lower than its 24.6% high recorded back in November 2012.
The 2nd largest household credit item after mortgages is Instalment sales Credit, and this category’s growth rate of 5.5% continues to slow gradually, the result of a slowdown in the highly cyclical Durable Consumer Goods spending growth as Real Household Sector Disposable Income growth has slowed and interest rates started to rise.
Credit Card debt remains the highest growth component at 8.9% year-on-year in May, but this to has slowed sharply from above 20% early last year, while Overdrafts are the weakest major credit category, showing decline of -8.2% year-on-year.
MORTGAGES PROBABLY STILL HAVE SIGNIFICANT “DOWNWARD REAL CORRECTION” TO COME
• New mortgage credit growth is slow
If one looks at the slow pace of growth in value of new mortgage loans granted to the Household Sector, it would appear likely that further decline in real terms (inflation adjusted) in the country’s mortgage credit outstanding is highly likely.
The National Credit Regulator data for the 1st quarter of 2015 put mortgage credit growth at a lowly 3.9% year-on-year, having slowed from prior quarters. This pace of growth would appear insufficient to lift the slow pace of growth in the overall value of mortgage credit outstanding, given the run down in value of that mass of boom time loans from last decade.
• Mortgage Debt levels probably haven’t fully “normalized” yet
After a massive boom period last decade from around 2000 to 2007, which included widespread speculation and 1st time buyer panic and resulted in rampant Household Sector Mortgage Credit growth, a key question to be asked is whether the value of this form of credit has “normalized” since? In other words, has the real value of Household Sector Mortgage Credit declined back to “appropriate levels?
We would contend that the answer is “probably not yet”. Certainly we have seen a very significant downward real adjustment in Mortgage Credit outstanding to date. In the 1st quarter of 2015 we saw a further -0.9% year-on-year decline in the real value of Household Sector Mortgage Credit growth (adjusted to real terms using the Private Consumption Expenditure Deflator), the 17th consecutive quarter of real decline.
This brings the cumulative drop in the real value of household mortgage credit to -15.8% from the 1st quarter of 2008 peak to the 1st quarter of 2015.
However, the early-2015 real value of mortgage credit outstanding remains a staggering 104.8% higher than the real value as at the 1st quarter of the year 2000.
A different way to evaluate the level is to compare the value of household mortgage debt with the level of disposable income.
Here, too, we see a very significant drop in the Household Sector Mortgage Debt-to-Disposable Income Ratio, from 49.2% as at the 1st quarter of 2008 to 36.2% in the 1st quarter of 2015.
Once again, however, while this decline has been impressive, the most recent percentage is on the high side compared with 28.7% as at the 1st quarter of 2000.
It all, therefore, appears as if the value of outstanding mortgage debt is still on the high side despite a big real decline post the boom years. Admittedly, however, which historic level one takes as a “benchmark” is debatable.
What appears to have “normalized” is the ratio of Household Sector Mortgage-to-non-Mortgage Credit ratio. From a high of 70.2% of total household credit in 2009, mortgage credit has receded all the way back to 58.7% of total by May 2015. This is even lower than early last decade back in 2001.
However, there is a catch to this, and that is that overall Household Sector Credit remains at very high levels by historic standards.
While the Household Debt-to-Disposable Income Ratio has dropped from a 2008 peak of 88.8% to 78.4% by the 1st quarter of this year, the most recent percentage still dwarfs the 53.6% of early-2000.
In short, the appropriate level of mortgage debt is highly subjective. Following last decade’s boomtime peak, the level of outstanding mortgage debt has declined significantly in real terms. However, comparing it to early last decade, before the boom time growth surge in mortgage lending had really gathered steam, we still believe the current levels to be on the “high side”.
CONCLUSION
Slow Household Sector Credit growth these days is not only about sluggish mortgage growth, but increasingly about slow growth in the non-mortgage categories.
This slow growth, however, is appropriate at a time of weak economic growth which has constrained Household Disposable Income growth to such an extent that, despite slow credit growth in the 1st quarter the Household Debt-to-Disposable Income Ratio actually rose slightly.
Read more here: Consumer Banking Barometer May Household Credit June 2015
