The Household Financial Picture

Given that the financial well-being of the country’s household sector is key to the strength of the residential property and mortgage markets, it is important to keep a close eye on this part of the economy.

In recent times, we have started to see the early encouraging signs that the household sector’s financial position may start to turn for the better. Most notable was the SARB not hiking interest rates in August, and as oil prices decline and global food price inflation tapers a bit we are increasingly hopeful that the country has finally reached the end of interest rate hiking.

With the expectation that interest rates will only start to decline around April next year, it is what is believed to be the start of a declining trend in the household debt-to-disposable income ratio that is expected to lead to the all-important household debt-service ratio (cost of servicing household sector debt as a percentage of disposable income) commencing its decline at the end of this year, prior to being helped lower by interest ate cuts.

But life hinges around more than just debt, and the encouraging global inflation news in the form of declines in commodity prices bodes well for local inflation. We may well be very near to the peak in consumer price inflation numbers, and with the country’s wage bill inflating steadily, a decline in inflation should translate into a recovery in disposable income growth in real terms, possibly late in the current year, after a declining growth trend spanning back to the beginning of 2007. This anticipated recovery in real disposable income growth is expected to precede an economic growth recovery, but is based on the assumption that, although economic growth will go slower for a while, SA will not fall into a recession.

The initial recovery in real disposable income growth is expected to be driven in part by higher average wage inflation, inflation, and unfortunately this may mean a period of net job loss and greater income inequality as employers try to contain their wage bill growth.

Nevertheless, the anticipated improvement in the household sector’s financial situation, in turn, is expected to reverse the fortunes of the country’s ailing residential mortgage market, and after sharp year-on-year declines since mid-2007, the value of new mortgage loans is expected to return to positive year-on-year growth towards the second half of 2009.

Click here to read the full report (PDF file  176kb)