Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2015-08-07

With the recent increase in interest rates and the confirmation that we are on the upward trending curve of the interest rate cycle, with further increases expected before year-end, the question to ask at this stage is how financially vulnerable are South African households in general. Consumer "Credit Health" depends to a large degree on how easy we are able to weather the additional costs of debt as interest rates increase.

FNB's recently published report on the consumer credit environment does provide a reasonably positive perspective and describes overall credit health as "reasonably good". This view is substantiated by the recorded number of insolvencies that has decreased by -5,7% year-on-year. StatsSA insolvencies data averaged 230 insolvencies per month for the first 5 months of 2015. This is significantly better (lower) than the 451/month average experienced during the same period in 2009.

The TransUnion Consumer Credit Index has moved upwards over the last three quarters indicating improved credit health. They do however warn that because of outstanding household debt to disposable income remaining relatively high at 78.4% we can expect some vulnerability and risk to remain.

Two indicators of consumer credit health in the property market are the percentage of seller's downscaling due to financial pressure and the percentage of tenants in good standing. The FNB Estate Agency Survey has reported that the percentage of seller's downscaling due to financial pressure is currently at approximately 13%. Over the past two years this figure as been between 11% and 14% and is considerably lower that the peak of 34% experienced in 2009. The percentage of tenants in good standing is currently approximately 86% - a trend that has improved consistently since the low point of 71% in 2009.

There is no doubt that the historically low interest rates that we have enjoyed over the past few years have helped South African households weather the relatively high debt environment. It is important to note that even though our overall debt to disposable income ratio has come down from a peak of 88.8% in 2008 to its current 78.4% this is still very high and far higher than the 50% to 60% levels that were the norm during the decade prior to 2005.

Without the influence of the world economy on our local finances we would be confident that the interest rate increases expected would be small. The influence of a slowing growth rate in China and the pending prospect of the US increasing their interest rates are aspects that could force our local Reserve Bank to increase rates quicker or more substantially. These are international risks that all South African households with mortgage bonds face and should be aware of.

In June of this year overall debt in our household sector increased by 3,5% as a year-on-year measure. Unfortunately the "good debt" (mortgage credit) grew at a lesser amount of 2,8% while non-mortgage credit extended grew at 4,6%. In this non-mortgage category, overdrafts and general loans were the drivers of this growth. Installment sales credit did however slow, which reflects weaker demand for durable goods such as motor vehicles. When vehicle sales are booming you will find that the installment sales credit category will shoot up as most vehicles are purchased on this basis. It is interesting to note that the split between total household mortgage credit extended and non-mortgage credit is 58.7% to 41.3% respectively. This gap has narrowed as people are raising more debt to finance current expenditure relative to financing mortgages, which represent a longer-term investment.

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

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com

Springclean

Enlarge View Link

Nissan T5ekton

Enlarge View Link