Johannesburg - Household debt-service looks to have improved, according to FNB's Household Debt-Service Risk Index which has found a mild third-quarter decline to a level of 6.03 from a previous quarter's index level of 6.10 (on a scale of 1 to 10).
John Loos, household sector and property strategist at FNB Home Loans, said this represented the third consecutive quarter of decline in its simple measure of household debt service risk.
He said that while a gradual improvement (decline) in household debt service risk in 2011 had been seen due to a declining trend in the household debt-to-disposable income ratio, the 6.03 index level remained relatively high and was still well above the 31 year average of 5.2.
Loos warned it was not yet time for the household/consumer sector to declare victory in the "balance sheet rebuilding" exercise.
The index was compiled from three variables: the debt-to-disposable income ratio of the household sector, the trend in the debt-to-disposable income ratio, and the level of interest rates relative to long-term average (five-year average) consumer price inflation.
The index owed its decline to the declining trend in the household debt-to-disposable income ratio, with households growing their borrowing cautiously at rates slow enough to allow disposable income growth to outpace borrowing growth.
Loos pointed out that the one variable which contributed negatively to the overall index was the measure of the real interest rate, which continued to decline as the recent rise in consumer price inflation continued to push up the five-year average inflation rate, bringing it nearer to the currently static 9% prime rate.
He said this increased the risk that we were near the bottom of the interest rate cycle, and also heightened the risk of future upward moves in interest rates.
The bottom of an interest rate cycle is generally the riskier period in which to lend/borrow as compared to its peak, which is not always understood by lenders or borrowers.