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Johannesburg - The vulnerability of South Africa’s household sector when it comes to being able to service its debt in future deteriorated slightly in the second quarter of 2013, according to the FNB Household Debt Service Risk Index.
Slowing household income growth means that not enough has yet been done to reduce household debt service risk significantly, said John Loos, FNB's household and property sector strategist.
"From a revised first quarter 2013 index level of 6.54 (on a scale of 1 to 10), the second quarter saw a slight rise to 6.59. This comes after a prior slight decline, which we had thought may have been the start of an improving trend, but it was not yet to be," he said.
The level of the Household Sector Debt-Service Risk Index remains high, well-above the long term (33 year) average level of 5.2.
"At current high levels it would be preferable to be seeing significant decline prior to the next interest rate hiking cycle," said Loos.
He pointed out that households tend to make poorer borrowing decisions, on average, when money is cheap and far better ones when interest rates are relatively high.
"That’s a common human weakness and part of the logic of viewing low interest rate periods as ones where risk generally builds up," he said.
"This is especially the case when rates are 'abnormally low' by a country’s standards, as is currently the situation in SA."
In the first quarter of 2008 the household debt-to-disposable income ratio reached its all-time high.
After a brief two quarters of an unchanged debt-to-disposable income ratio, the second quarter of 2013 saw a resumed rise in the ratio.
"This may come as a surprise to some, with lending institutions having pulled back on certain categories of household sector credit and overall household sector credit growth having slowed in recent times," said Loos.
"However, the slowdown in household sector credit growth could not match the slowing pace of nominal disposable income growth in a weak economy, thus translating into a rise in this all-important indebtedness ratio."
The South African Reserve Bank's quarterly measure of household sector credit growth slowed further from 9.2% year-on-year in the first quarter to 7.9% in the second.
Nominal disposable income growth slowed from 8.6% to 7.8% over the same two quarters. The net result was a rise in the household debt-to-disposable income ratio from a first quarter’s 75.4% to 75.8% in the second quarter.
At 75.8%, the debt-to-disposable income ratio remains extremely high by SA’s historic standards and still of concern is the fact that recent quarters’ figures continue to show 'resistance' to decline," said Loos.
The interest rate risk index remains at a relatively high level of 7 as at the second quarter of 2013, although it has not risen in recent times, as the Reserve Bank has not lowered interest rates for over year now.
"In recent years, interest rates have moved to abnormally low levels by SA’s historic standards, given that “structural consumer inflation appears to be somewhere near to 6%," said Loos.
"This decline is due to an abnormal global and domestic economic situation requiring significant monetary policy support."
Loos said SA may soon get it right to slowly “engineer” a decline in the debt-to-disposable income ratio to lower and safer levels without having to hike interest rates to do the job.
This would be provided disposable income growth does not dip too much lower.
"This slowing household credit growth is largely due to slowing non-mortgage components of household credit growth, which may be the result of successful 'verbal intervention' by the authorities," he said.
"But slower household credit growth needs to continue for a prolonged period in order to reduce the debt-to-disposable income ratio, preferably before the next interest rate hiking cycle."
- Fin24
Slowing household income growth means that not enough has yet been done to reduce household debt service risk significantly, said John Loos, FNB's household and property sector strategist.
"From a revised first quarter 2013 index level of 6.54 (on a scale of 1 to 10), the second quarter saw a slight rise to 6.59. This comes after a prior slight decline, which we had thought may have been the start of an improving trend, but it was not yet to be," he said.
The level of the Household Sector Debt-Service Risk Index remains high, well-above the long term (33 year) average level of 5.2.
"At current high levels it would be preferable to be seeing significant decline prior to the next interest rate hiking cycle," said Loos.
He pointed out that households tend to make poorer borrowing decisions, on average, when money is cheap and far better ones when interest rates are relatively high.
"That’s a common human weakness and part of the logic of viewing low interest rate periods as ones where risk generally builds up," he said.
"This is especially the case when rates are 'abnormally low' by a country’s standards, as is currently the situation in SA."
In the first quarter of 2008 the household debt-to-disposable income ratio reached its all-time high.
After a brief two quarters of an unchanged debt-to-disposable income ratio, the second quarter of 2013 saw a resumed rise in the ratio.
"This may come as a surprise to some, with lending institutions having pulled back on certain categories of household sector credit and overall household sector credit growth having slowed in recent times," said Loos.
"However, the slowdown in household sector credit growth could not match the slowing pace of nominal disposable income growth in a weak economy, thus translating into a rise in this all-important indebtedness ratio."
The South African Reserve Bank's quarterly measure of household sector credit growth slowed further from 9.2% year-on-year in the first quarter to 7.9% in the second.
Nominal disposable income growth slowed from 8.6% to 7.8% over the same two quarters. The net result was a rise in the household debt-to-disposable income ratio from a first quarter’s 75.4% to 75.8% in the second quarter.
At 75.8%, the debt-to-disposable income ratio remains extremely high by SA’s historic standards and still of concern is the fact that recent quarters’ figures continue to show 'resistance' to decline," said Loos.
The interest rate risk index remains at a relatively high level of 7 as at the second quarter of 2013, although it has not risen in recent times, as the Reserve Bank has not lowered interest rates for over year now.
"In recent years, interest rates have moved to abnormally low levels by SA’s historic standards, given that “structural consumer inflation appears to be somewhere near to 6%," said Loos.
"This decline is due to an abnormal global and domestic economic situation requiring significant monetary policy support."
Loos said SA may soon get it right to slowly “engineer” a decline in the debt-to-disposable income ratio to lower and safer levels without having to hike interest rates to do the job.
This would be provided disposable income growth does not dip too much lower.
"This slowing household credit growth is largely due to slowing non-mortgage components of household credit growth, which may be the result of successful 'verbal intervention' by the authorities," he said.
"But slower household credit growth needs to continue for a prolonged period in order to reduce the debt-to-disposable income ratio, preferably before the next interest rate hiking cycle."
- Fin24
