The borrowing equation is all out of kilter
South Africa’s big four banks publish reams of data on the state of the country’s consumer. In the latest First National Bank (FNB) Property Barometer the FNB team takes a closer look at consumer borrowing. Their mortgage and household credit survey suggests that consumers have switched their borrowing activities from mortgages to other short-term debt instruments. And that’s the equivalent of switch from “good” borrowing to “bad”.
Mortgage loans growth for January 2011 came in at 3.8% year-on-year, down from 4% in December last year. FNB believes the contraction, largely driven by a slowdown in home loans, has been exacerbated by a slowdown in commercial and farm mortgage growth too. “The very slow growth in the dominant residential component of mortgage loans (4.1% in December 2010 and slowing) remains unsurprising given the weak state of household sector finances,” observes John Loos, home loans strategist at FNB. South Africa’s poor savings track record has combined with tougher bank-imposed deposit requirements to depress the residential housing market.
Turning to short-term loans to make ends meet
A different picture emerges when household credit growth is placed under the microscope. Total household sector borrowing has been accelerating since the beginning of 2010. By December 2010 the year-on-year growth was at 6.8%, spiking to 7.5% in the first month this year. The blame for the sharp acceleration in total household credit lies squarely on the shoulders of “Other loans to the household sector”, which topped 30.5% year-on-year growth in January. This category is cause for concern… But the 7.8% surge in the “Instalment sales and leasing finance” category isn’t as much of a surprise. New passenger vehicle sales have been particularly strong through 2010 and the first two months of this year!
“While some may see accelerating household borrowing growth as a reflection of better economic or interest rate times, it may also be sustaining the high level of vulnerability of the household sector to external shocks,” says Loos. South African consumers are already struggling with very high household debt to disposable income, topping 78.5% at 30 September 2010. Higher debt makes it difficult for households to survive job losses, interest rate hikes and spiralling inflation. The fact so many households are extending their short-term debt is cause for concern as the next rising interest rate cycle looms.
Be warned the up-cycle isn’t far off
Loos reckons the next hike in interest rates isn’t far off, and a cursory glance at the latest macroeconomic indicators suggests we’re in for a very difficult year. The biggest threat to local inflation – initially thought to be a resumption of the long-term weakening of the rand against foreign currencies – turns out to be from oil! As I pen this newsletter the per barrel cost of Brent Crude oil has surged to $115/barrel. And that means local motorists, commuters and businesses will soon be staring down the barrel of massive petrol and diesel price increases. All grades of petrol were hiked 26c/litre early February 2011, with another 43c/litre increase in March… As unrest rips through the Middle East we could see oil spike to its mid-2008 highs of $150/barrel, in which case R10 to R12 per litre of petrol is a reality.
Factor in Eskom’s 25% hike in April and rising global food prices and the interest rate hike (expected towards year-end 2011) could happen a great deal sooner. “The surge in household credit growth, when viewed against the backdrop of rising inflation, and thus interest rate risk – combined with the already high level of household indebtedness and weak savings rate – should raise serious concerns,” says Loos. “It looks increasingly likely that we may enter the next interest rate hiking cycle with a still-high debt-to-disposable income ratio, which would place the already weak housing market under further pressure!”
Editor’s thoughts: There’s no escaping the inflation monster. Although fuel isn’t a major portion of the Reserve Bank’s CPI basket it has a knock-on effect across all sectors of the domestic market. Suppliers and producers of food, building materials, and loads of unrelated goods and services have to hike their prices to maintain profitability against rising input costs… How soon do you think the Reserve Bank will hike interest rates – and how many hikes are we likely to see this year? Add your comment below, or send it to [email protected]
