Interest rates finally begin to bite
After 10 successive interest rate hikes which saw the prime interest rate moving from 10.5% in June 2006 to 15.5% today, the consumer is finally showing signs of cracking. And while this doesn’t sound like the kind of thing the country’s central bank should want to achieve – that’s exactly what an inflation targeting monetary policy results in. When consumer growth gets out of hand – fuelling inflationary pressures – the repeated hiking of interest rates is supposed to dampen demand.
Right now inflation is doing as good a job as the Reserve Bank at cutting disposable income. Petrol is a perfect example. As oil continues its march beyond $140 per barrel local consumers have had to endure six consecutive petrol price hikes. A litre of 93 Octane fuel (in Gauteng), which would have cost you 733c in January, now changes hands at 1050c. That’s an increase of 317c per litre (+43%) which amounts to an extra R190 every time you fill your 60 litre fuel tank!
Mortgage book still growing – but
South Africa’s total mortgage book stood at R898.3bn at the end of May 2008 – a growth of 20.6% year-on-year. And although this number seems to contradict our opening comments economists point out that this growth is significantly down on the 30.9% year-on-year growth peak recorded in October 2006. They say that the falling trend in new mortgage advances is far more telling. FNB economist John Loos told Business Report that new mortgages and re-advances are down 16.7% for Q1 2008. And this dearth of new ‘home loan’ money is being felt in the market for residential real estate.
Standard Bank released its June 2008 “Residential property gauge” to reveal that the median house price contracted 11.3% year-on-year, falling to R550 000 from its previous R620 000 level. The latest decline brings the five month moving average to 7.8% – somewhat less than the current CPIX of 10.9%. What this means, according to Standard Bank’s measure, is that real house prices are falling. The report summarises this trend neatly: “The broad trend within the South African residential property market is in line with the evolving and intensifying headwinds currently confronting the South African consumer.”
Latest South African Reserve Bank numbers show that the average South African’s debt servicing ratio stands at 11.78%. What this means is that debt repayments expressed as a percentage of disposable income is very close to the 12% ‘danger’ level. The last time this ratio reached 12% was in 1998 when prime went over 25%. And the time before that (1986) required similar interest rate interventions! To understand why this ratio is creeping up we need only consider the monthly cost of servicing a R500 000 mortgage. In June 2006 you were paying R4 992 per month, today you’re digging deep to find R6 769… that’s a whopping 36% jump!
A possible increase in ‘distress’ borrowing
Many problems emerge as consumer disposable income drops. The first major issue is the affordability factor. Households suddenly find that they cannot support the lifestyle they’ve become accustomed to. Adjustments have to be made. For the lucky households it means less entertaining, partying and luxury goods. For those who are under more severe pressure it might require serious restructuring of debt while those who refuse to moderate their spending behaviour often resort to ‘distress’ borrowing!
How much pain are consumers facing? A recent www.justmoney.co.za poll surveyed 550 individuals between the ages of 25 and 45 with disposable incomes in the region of R15 000 to R20 000 a month to get some answers. Approximately 40% of respondents admitted to cutting out their ‘night on the town’ to save money – with one in 10 taking more drastic measures to make ends meet. Website MD Paul Beadle said “South Africans must realise that the only way they can get straight financially is to stop taking out credit every time they want something…”
But the biggest indicator of consumer hardship is from insolvencies and repossessions. Earlier this year we mentioned that the country’s leading vehicle financers were taking back more than 4 000 vehicles every month. And bank repossessions of houses are on the rise too.
Editor’s thoughts:
With bond repayments up 36%, petrol up 43% and overall consumer price inflation growing at 12% or more things are looking tough for South African consumers. What advice do you give your clients to survive the current onslaught on their disposable income? Add your comments below, or send them to [email protected]
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