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Consumers wary of taking on more credit

Feb 01 2017 19:31
Carin Smith

Cape Town - Growth in household credit balances, including mortgage balances, is forecast to remain relatively low in 2017, according to Jacques du Toit, property analyst at Absa Home Loans.

The value of outstanding credit balances in the SA household sector increased by a negligible 0.7% to R1 485.7bn in 2016, down from growth of 4.5% in 2015.

According to Du Toit, this was the result of growth in secured credit balances slowing down, whereas unsecured credit balances contracted compared to 2015.

Growth in the value of household secured credit balances (R1 139.6bn or 76.7% of total household credit balances) dropped to 2.3% y/y at the end of December last year compared with growth of 3.8% y/y at the end of December 2015.

Du Toit told Fin24 this means consumers will take up less credit, which in turn means the growth in household credit will remain relatively low.

This is because consumers are under pressure due to factors like inflation. On top of that interest rates increased and are not expected to come down this year. Confidence levels are low and that is an important factor in consumers' decisions to buy items like luxury goods - for example, jewellery, electronic equipment, vehicles household furniture and appliances.

"If consumers don't have the confidence to buy those items - which are usually credit related and credit sensitive - the demand for credit will remain low, said Du Toit.

"This is not good for credit providers as their books won't grow that fast and if consumers are not spending it will have an impact on economic growth as household consumption makes out 60% of SA's gross domestic product (GDP). The business sector will also feel the impact in terms of goods and services."

READ: Why SA consumers are in for a rough ride in 2017

He explained that, from an economic growth point of view, it is not good for the economy not to have high levels of spending. One must see this against the background of various factors, though.

At the same time, he pointed out that, by not taking up huge amounts of credit, consumers will not further damage their credit records and increase their levels of debt.

"I do not believe consumers should increase their levels of debt to a large extent. The outlook for the economy is not that positive at this stage and debt won't become cheaper," said Du Toit.

"Against the background of the broader economic outlook I can't see consumer spending picking up at a faster pace. Demand for credit will, therefore, also not pick up quickly."

Mortgage balances

Du Toit explained that the slowdown in growth in secured balances in 2016 came on the back of lower growth in household mortgage balances, whereas instalment sales balances (21.5% of household secured balances), largely related to vehicle finance, contracted by 0.8% last year compared to 2015.

The contraction in instalment sales balances commenced around mid-2016 and is in line with a downward trend in new vehicle sales volumes, which dropped by 11.4% in 2016, he added.

Household unsecured credit balances (R346.1bn and 23.3% of total household credit balances) contracted by 4.2% y/y at the end of December 2016 compared with growth of 6.7% y/y at end-2015.

READ: Ten reasons why consumers are more demanding

"The contraction in general loans and advances balances is mainly the result of data distortions during last year, with the component of general loans and advances (largely personal loans and micro finance) the main factor behind this contraction," said Du Toit.

"However, outstanding credit card balances also contracted in 2016, by 1.2 %, which contributed to the contraction in overall household unsecured credit balances last year.

The value of outstanding household mortgage balances increased by 3.2% to R891.7bn in the 12-month period up to the end of December last year compared with growth of 4.4% y/y at the end of 2015.

According to John Loos, household and property sector strategist at FNB, should interest rates not rise further, "likely ongoing decline in the household debt-to-disposable income ratio, resulting in decline in the debt-service ratio, could conceivably see to it that mortgage market stress is lowered in 2017 and beyond".

"If interest rates don’t rise further in 2017, it is conceivable that we could have a year of improving (declining) residential mortgage market 'stress', and some mild decline in mortgage arrears levels," said Loos.

This is due to the likelihood that household sector credit will continue to grow noticeably slower than nominal disposable income growth, thereby further lowering the all-important household debt-to-disposable income ratio, which in turn lowers the vulnerability of households to interest rate hikes. But it’s the forecasting of interest rates that always remains the 'hazardous business'."

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sa economy  |  credit  |  money  |  consumers


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