Property Talk

If you really want to understand the property market, the one sector you have to have a complete understanding of is the extent and growth of private sector debt and in particular that part of it that is attributable to mortgage finance. We know that over the past 7 years the key economic indicator called household debt to disposable income has declined from its peak at 83% to its current level of 73,5%. Why would this be important to know? It provides insight into the strength of household balance sheets and to what extent additional mortgage debt can be used by households in general. If your debt to disposable income is low, you have capacity to take on debt to finance property.

If however you are up to your eyeballs in debt, you will have little additional capacity to purchase property using mortgage finance. ABSA's recently published report on the South African credit and mortgage market indicates that the total value of all private sector debt is approximately R2,785,5 bn and has been growing at 9,1% year-on-year. Of this debt, R1,401.4bn, or 50.3% can be attributable to households in the form of secured and unsecured debt. The growth of this debt is down to 3,6% year-on-year. A year ago this was growing at 5,9% - almost double, and mostly attributable to the incredible growth in unsecured debt at the time. This has all changed with the dramatic adjustment of the unsecured debt market in South Africa, with the recent failure of African Bank that specialized in unsecured micro-loans.

From a macro-economic viewpoint, the limitation of unsecured lending provides for a more responsible use of debt finance. Using debt to finance current expenditure or any purchase that is not appreciating in value over time is always dangerous and should be avoided if at all possible. Unfortunately many poor people get caught in this debt trap of having to borrow just to pay for current living costs at punitive interest rates, which reflect their risk profile to the lenders. As a property professional I view mortgage debt as "good debt" and unsecured credit (such as short term loans and credit card debt) as "bad debt". The value of total household mortgage balances is currently R825.2bn or 58.9% of total household credit balances.

That means that there is R576.2bn in household debt other than mortgage finance that includes R334.4bn in unsecured debt. Fortunately the year-on-year growth in this debt has slowed down to 5,8% but is still a concern as I see it as potentially crowding out mortgage debt (the "good" type). The year-on-year growth in our South African household mortgage debt balances, which includes all property transactions related to mortgage loans by households and all additional capital amounts paid into mortgage accounts, is currently only 2%.

This is low and leads us to ask the question as to whether the improvement in the property market is sustainable without a more significant growth in overall mortgage finance? As 71.7% of all mortgage debt in the country relates to private sector household mortgages, it is such an important component of the residential property market, and its growth rate is therefore key to how the property market performs over any given period of time. The flip-side of the coin is that while mortgage growth is relatively low, we can expect less competition in the buying market and this indicates that it remains a great time to buy. Once mortgage growth accelerates, those buying opportunities may no longer be readily available. Although our interest rate cycle is on the up, the current consensus is that interest rates are expected to only increase to 10% from the current 9,25% by the end of 2015. This therefore still provides a historically low interest rate environment and an ideal time to finance a property purchase.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Seeff KZN Chairman

Principal - Seeff Dolphin Coast

andreasw@seeff.com