Property Markets: A look at the household sector's situation

The Economic deterioration exposes the fragile financial situation that the household sector constantly finds itself in.

Summary

The current period of rising interest rates and slowing economy, which brings about the inevitable job loss in certain industries, is far from crisis proportions at this stage, and the likelihood is that, as usual most households will come through it intact.

However, this weak economic phase has once again served to highlight the financially fragile financial situation in which the South African household sector (along with certain other western nations it must be added) finds itself. While much is made of high levels of household debt, a key cause of this fragile situation is the ongoing low rate of savings as well as for what household debt is used, i.e. predominantly on consumer goods and non-income generating assets.

Almost all indicators related to the well-being of the household sector show deterioration. Households are not only battling due to rising interest rates, it is also a case of surging inflation that is eating into disposable income, driving a steady declining real disposable income growth rate since early-2007. Negative real wage growth is the order of the day.

While this year we should see wage inflation laying catch-up, this is only of comfort for those who are employed, and with an economic slowdown increasingly apparent, the start of job losses looks set to be the next negative factor to eat into overall
household sector disposable income growth.

Households have undoubtedly responded strongly, cutting back on new credit-driven spending sharply, to the detriment of the vehicle and residential property markets.

New vehicle sales by June were declining by 22% year-on-year, while new residential mortgage loans have experienced 3 quarters of decline in value, dropping by -26% year-on-year by March.

2008 as a whole is expected to see at least a quarter of the value of the new residential mortgage loan market disappear, and positive year-on-year growth is projected to return only in the second half of 2009 as the expected turn in interest rates arrives. The sentiment crisis seemingly sweeping through minority population groups at present (affecting residential demand as emigration rates rise) is also expected to abate towards 2010. For the time being, however, almost all of the related indicators suggest that the household (and housing) situation gets significantly worse before it gets better.

Focus: Don't keep up with the Joneses, They're insolvent

While many are desperately searching for quick fixes to mounting financial pressure, the ultimate solution lies in ending financial self-imprisonment through raising our rate of savings

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