Debt Service Risk (The Ballito Mag)

If you are a property owner and would like to have a clear understanding of when best to buy or sell, there are certain key macro-economic trends to keep a careful watch over. The micro-elements we as sellers have control over relate to the presentation and quality of the property and the marketing over the seasonally best time of the year. Timing a sale is more important in areas with large seasonal climate variations, such as Gauteng and Cape Town, and less important in areas with low seasonal climate variations, such as KZN. Many would claim that selling a property in May in KZN, especially along the coastal regions, is in fact better than mid-summer. These aspects can have a significant impact on the salability of any particular home, but the general market trend and cycle have an arguably more profound impact. Buyers are best equipped to commit to a property when they have access to readily available mortgage funds, when the cost of this is relatively low, when they have the capacity to take on and service debt and when they are feeling up-beat and confident about their future prospects. Economists measure these drivers of buyer behavior and report them as GDP growth as a measure of general economic activity, residential mortgage credit growth, the prime interest rate, the household debt and disposable income ratios and the household sector debt service risk index. Considering the measurements of these key statistics provides us with excellent insight into the state of the property market and what can reasonably be expected within the medium term.

Hot of the press is the FNB published analysis of the household sector debt-service risk index. This index measures, on a scale of 1 to 10, the vulnerability of the country’s household sector when it comes to being able to service its debt in the future. This brilliant predictor of the financial resilience of households is compiled from the household debt-to-disposable income ratio, the trend in the debt-to-disposable income ratio, and the level of interest rates relative to the long term average consumer price inflation. As you can imagine the higher an individual’s (or the country’s household sector as a whole) debt-to-disposable income ratio, the more vulnerable the individual or household sector is to unwanted “shocks” such as an interest rate hike or downward pressure on disposable income due to unemployment or declining economic activity. The 4^th quarter measurement of this index is 6.55 which remains high relative to the long term average of 5.2. It remains high largely because the indebtedness risk of households remains high. This remains high because our overall household debt-to-disposable income remains high at 75.8%. Interest rates remain at historical low levels with the prime interest rate at 8.5%, down from its more recent peak of 15.5% in 2008. When interest rates are low however, the risk is that they will increase making households more vulnerable. FNB predict that interest rates have room to move upwards, but caution that any increase above 12% would be met with severe financial pain given the current household debt levels.

As a property professional, what has fascinated me is the change in household credit growth. Residential mortgage credit growth and non-mortgage household credit growth moved predictably in tandem from 2002. However, from January 2010 the growth in non-mortgage credit growth has been exponential and is currently at 23.29%, while mortgage credit growth has declined to the lowest levels over the same period and are currently 1.25%. This alarming growth in unsecured lending, with banks such as African Bank and Capitec leading the charge, has been severely criticized by economists and government alike. In a Financial Mail lead story published on 14 Feb 2013, the question was raised on the sustainability of African Bank’s business model and reported that the National Credit Regulator had made an allegation of reckless lending against African Bank and requested that the Consumer Tribunal fine the company R300m. Finance Minister Pravin Gordhan is equally concerned about the low rate of mortgage growth, which is viewed as lower risk positive lending as it finances assets that tend to grow in value over time, while at the same time witnessing the more risky unsecured lending growth. Gordhan has reportedly engaged with the banking sector to discuss these issues. This is important as mortgage growth underpins the residential property market.

(Author: Andreas Wassenaar, published in The Ballito, April 2013)