Household debt scales a new peak
September 14, 2007
By Ethel Hazelhurst
Johannesburg - Household debt notched up another record high in the second quarter, at 76.6 percent of disposable household income, according to the Reserve Bank's Quarterly Bulletin, released yesterday.
This is up from 75.9 percent in the first quarter and way above the 49.8 percent in the fourth quarter of 2002.
The ratio is high by historic standards, but it is far less than many other countries. In New Zealand and Australia, for instance, it is at or close to 160 percent and in the US it is just less than 130 percent, says Dennis Dykes, group economist at Nedbank.
However, the local figure is misleading, as relatively few South African households have access to credit. If their debt was compared only with their household income, not the country's total household income, it would make the ratio much higher.
As revealed in a survey by Credit Suisse Standard Securities (CSSS) earlier this year, these ratios ranged between 95 percent and 135 percent of disposable income.
Dykes said the more important number was the cost of servicing debt as a ratio of income. "We estimate this was 9.7 percent in the second quarter - much lower than the peak of 15 percent in the third quarter of 1998, which caused major stress and loss to households."
But he cautioned that the ratio was probably now more than 10 percent, the threshold that puts many households at risk. CSSS research shows a far more disturbing debt level, suggesting the burden ranged between 25 percent and 40 percent for households earning more than R7 000 a month.
Surprisingly, though, the survey shows this figure has remained relatively unchanged since 2000. And in the reporting period, growth in credit extended "appears to have been driven more by a broadening of access to credit markets than by additional credit demand from existing debtors".
In other words, the debt burden is now distributed among more households.
Another factor to consider is how the borrowed funds are used. If they fund consumption, high debt levels are far more dangerous than if they buy assets that increase in value.
But Dykes points out that home loans "have been used as overdrafts in recent years". In other words, people have borrowed against the security of their homes and used the money for other purposes.
However, growth in all categories of credit extended is slowing.
Shireen Darmalingam, an economist at Standard Bank, said: "Growth in the core private sector credit extension [PSCE] - which includes leasing finance, installment sales and mortgage advances, and makes up roughly 61.9 percent of the total PSCE basket - slowed marginally to 23.02 percent year on year in July, from 23.5 percent in June and 27.2 percent in July 2006."
Some categories of credit are slowing more sharply than others.
Dykes said mortgage loan growth slowed from more than 30 percent in January to 26.7 percent in July; instalment sales and leasing combined slowed from 22.2 percent in February 2006 to 11.7 percent this July.
The slowing shows that the 3 percentage point hike in prime and rates to 13.5 percent is starting to contain credit growth. And it implies the chances of no further rate hikes are improving.
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