South African Property News

Debt Burden on Consumers Increases

An article in the Mail & Guardian Online has indicated that consumers and small businesses are beginning to collapse under the increased debt burden created by higher interest rates, petrol prices and food prices.

The latest figures from Statistics SA paint a rather dismal picture, with personal insolvencies increasing by 58% last month compared to the same time a year ago and the civil debt judgments against companies skyrocketing to 41.2%. Even liquidations for the first two months of 2008 increased by 6%, which is the first time since February 2002 that this has happened. This comes as no surprise though, considering that the ratio of levels of household debt to disposable income rose to 77.6% at the end of last year, compared to just 72.8% at the end of 2006.

Not only is this the highest level of debt ever recorded in South Africa, the higher interest rates mean that the cost of servicing this debt has also risen. At the beginning of 2006, the cost of servicing debt was about 7.2% of disposable income, but this has since increased to 11.5%. Take into account petrol price hikes of 20% since the beginning of the year and the increase in food prices and the once pretty picture gets bleaker by the minute.

Standard Bank has reported an average repossession of two houses per month in 2007, with that number increasing to five houses per month since the end of 2007 and into 2008. 40% of repurchases for 2007 occurred in the last quarter, which is a trend that has continued this year.

Marcel de Klerk, a member of ABSA’s vehicle and asset finance division, says that it has seen an increase in repossessions in the first three months of 2008. Last year, an average of 100 vehicles a month were repossessed, compared to an unbelievable average of 1300 vehicles a month in 2008 so far. A 15% increase in car repossessions is expected for 2008.

The Reserve Bank reports that banks have made bad debt provisions of R10bn or 0.57% of their total assets. These are loans that have defaulted and the property (a house or car) is going to auction. A year ago, this figure was more like R7.8bn or 0.51% of total assets. As a percentage of assets, the increase that has occurred between December 2006 and the same time in 2007 represents a 10% increase in bad debts.

The main culprit when it comes to bad debt seems to be credit cards, which show the biggest potential for default. Although actual bad debts have only increased slightly over the past year, the number of repayments that have fallen in arrears (three months or more) has risen 54% when compared to a year ago.

Company insolvencies have also sharply increased and according to Jo Schwenke of Business Partners, which supports and finances small business development in South Africa, it is the restaurant industry that has been the worst hit. Schwenke reports that any business geared towards consumer-discretionary spending, including food stores like Pick n Pay and Spar, have seen a fall in turnover. The rapid increase in food prices has resulted in higher financial gain, but there is a clear indication that consumer spending has dropped.

“We are checking whether the business is sound and that the lower turnover is owing to broad economic slowdown – then we will restructure a deal to assist them. This is a priority for us right now,” says Schwenke, adding that Business Partners has also seen a slight upturn in arrears, increasing by around a third, but on small percentages.

The news is not all bad though, as businesses geared towards the infrastructure boom and sub-contracting to larger construction firms are still doing well. Those businesses geared to the export market are certainly benefiting from the weaker currency. There may be a fall in domestic tourism, but the industry as a whole is seeing more foreign visitors who are taking advantage of South Africa as a cheaper holiday destination.

The black cloud does have a sliver of silver lining though. The growth of private sector credit in February slowed faster than anticipated, registering 20.8% - down from 23.1% in January. The markets were expecting a somewhat modest slowdown of 21.9%. Economist Kevin Lings says that, “Although the slowdown is still relatively modest, it is expected to become more apparent during 2008.” Once these numbers are adjusted for inflation, the real credit is really only growing at 10.9% compared to its peak of 20.8% in February 2007 (Ling).

Mortgage lending grew by 0.8% in February and by 23.1% in the past year. Ling says that these numbers may be high, but it is the lowest monthly growth in mortgage credit since December 2002. In terms of value, mortgage advances only increased by R7bn in February as compared to a monthly average of R14.1bn in 2007.

Standard Bank’s property gauge reflected a drop in house prices for the first time in five years, with the average price being R550 000 compared to R580 000 previously. Credit card growth also decreased from a high of 44.1% in July 2007 to 21.6% this year.

Ling believes that a combination of interest rates and the introduction of the National Credit Act have helped to slow the demand for credit, as well as consumer and housing activity. “Hopefully, the Reserve Bank will be willing to continue to leave interest rates unchanged, while they assess the impact of the recent rate hikes,” says Ling. The key seems to be in a difficult economic atmosphere, consumers need to tighten their purse strings, borrow less and save more.

The information in this article is courtesy of Maya Fisher-French (“Under a debt weight”, Mail & Guardian Online, 10 April 2008).

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