South Africans have paid off a lot of debt since the last recession, but most are still spending too much and saving far too little, and that is a real obstacle to many more people becoming homeowners, says Rawson Property Group Managing Director Tony Clarke.
“The good news is that the household debt to disposable income ratio has declined from almost 85% at the start of the 2008/2009 recession to around 78% now, which means that the total amount of debt owed by SA’s consumers has decreased substantially in proportion to the total amount of income they take home each month.”
The positive effect of this on individual households is reflected in the latest available figures from the Old Mutual Savings and Investment Monitor (OMSIM), which show that the average percentage of household income committed to debt repayments each month has fallen from 15% in 2010 to 12% currently, he says.
“However, the money that consumers have freed up by reducing their debt commitments has unfortunately not been diverted back into savings. The OMSIM figures also reveal that the average percentage of household income that is committed to savings has dropped from 20% in 2010 to 15% currently – while the amount devoted to consumption and living expenses has risen from 58% to 68%.”
Indeed, says Clarke, it almost seems like consumers who were able to be very disciplined for the past few years have thrown caution to the wind again now that their debts have been reduced – and that is of course very bad news for those who have plans to buy their first home.
“It is also a pity to miss out on rising interest rates if you do have spare income now that could be used to boost your savings. With the prime rate now at 10,25% and expected to rise by at least another percentage point by the end of the year, even basic savings accounts are currently giving better returns than they have for many years.”
He says that with the average price of starter homes now sitting at around R600 000, most prospective buyers will need a deposit of around R60 000 to qualify for a home loan, plus at least another R20 000 in cash to cover bond and transfer costs. And at the current rate of saving, this total will take a household with monthly take-home income of R25 000 about two years to save – provided that those savings don’t have to be ‘raided’ for other things, like a major car repair or a medical emergency.”
Meanwhile, house prices will be increasing and interest rates will probably also be going up – requiring first-time buyers to have even more cash on hand to get into the market. “For example, if home prices were to rise just 10% over the next two years, and the prime interest rate rise by just one percentage point, first-time buyers would need at least another R7000 in cash to fund their purchase”.
“Their minimum monthly bond repayment would also increase by almost R1000, so they would need to be able to show an increase in their disposable income of at least 12% to meet the banks’ affordability criteria under the National Credit Act”.
“In short, the longer they continue to spend such a large percentage of their incomes and save such a small percentage, the harder it’s going to get to ever become a homeowner.”
Clarke also says that since regular living expenses such as food, transport, utility and education costs show every sign of continuing to increase, just about the only options consumers have at the moment if they do want to increase their savings is to once again slash any non-essential spending – while possibly trying to make some extra money from a part-time job or a home business.
“And potential homeowners are actually not the only ones who need to do this if we want to see an improvement in SA’s overall economic situation. The country clearly needs to start regaining the confidence of foreign investors, but that is going to be very difficult unless those investors can see that South Africans themselves are prepared to ‘invest’ by building up their savings”.
“As it is, the country’s gross savings equate to only about 14% of our GDP, while total household debt equates to 37% of GDP, so we have a long way to go.”