How stressed are South African households at present?
Despite the poor economic backdrop and the recent increase in interest rates, South African households generally still appear to be in reasonably healthy shape, particularly middle to high-income households. Elevated wage and salary growth and waning demand for credit have helped keep nominal growth in disposable incomes above the growth in household indebtedness since the last recession in 2008/9.
Household Sector Disposable Income vs Debt Growth
This trend has been particularly noticeable with regard to outstanding residential mortgage debt, where demand for mortgage credit has only recently picked up, following several years of sluggish growth in the aftermath of the 2008/9 recession. The ratio of household sector mortgage credit outstanding relative to disposable income has fallen further in recent quarters, declining to 34.8% in Q4 2015 from a peak of 49.2% in Q1 2008. Household mortgage advances grew rapidly from a trough of just below 30% of household disposable income in 2002/3 in tandem with a marked rise in residential property prices to a peak level of 49.2% in Q1 2008. The ratio had dropped mainly due to sluggish household mortgage credit growth and elevated nominal (not specifically real) wage growth since 2008.
Coupled with interest rates which still remain below prior historical peaks, it would suggest that the scope for severe stress (or a sharp rise in delinquency rates) in the residential mortgage sector remains limited at this time despite the poor economic backdrop. A reflection of this is the fact that the household sector debt service ratio remains lower than prior peak levels associated with a sharp rise in delinquency rates. Also according to FNB data, the number of residential property sellers due to financial pressure remains at or near a decade-low of around 14% (verse the 2008 peak of 34%).
The latest debt service ratio (as per SARB bulletin, Q4 2015) stood at 9.7% of disposable income, higher than the recent cyclical trough of 8.5% (2012/13) but still somewhat lower than the 2008 peak of 14.4%.
Nevertheless, a sharp rise in electricity and associated administered prices since 2008, including more recently food prices suggests that available disposable income after adjusting for these items is probably much lower than generally thought. And, therefore, the debt service obligation ratio as a % of disposable income after adjusting for these items is probably much higher than the official data suggests. This would suggest that although mortgage debt and in general household debt serviceability probably remains reasonable at present, it would probably take a smaller rise in interest rates (and not specifically back to the levels that were seen in 2008 and the late 1990s) in order to recreate the same level of consumer stress and, therefore, rise in delinquency rates. The prime rate reached a level of 15% in 2008 compared to the current level of 10.5%.Tags: credit, South Africa, ZAR