Household Debt on the Mend in SA

Good News At Last

According to John Loos, FNB’s property economist, there is improvement expected in the household sector’s financial situation that is likely to reverse the fortunes of the ailing residential mortgage market in South Africa. This means that after steep declines year on year since the middle of 2007, the value of new mortgage loans is expected to show positive growth year on year towards the second half of 2009.

When it comes to the strength of the residential property and mortgage markets, the well being of the country’s household sector is key and it is also important to keep a close eye on the economy. “In recent times, we have started to see the early encouraging signs that the household sector’s financial position may start to turn for the better,” says Loos.

He goes on to say that, “Most notable was the South African Reserve Bank not hiking interest rates in August and as oil prices decline and global food price inflation tapers a bit, we are increasingly hopeful that the country has finally reached the end of interest rate hiking”.

Loos indicates that with the expectation that interest rates will only begin to fall around April next year, it is also believed to be the start of a declining trend in household debt to disposable income ratio, which is anticipated to lead the all-important household debt service ratio (the cost of servicing household sector debt as a percentage of disposable income) commencing its decline at the end of this year, prior to being assisted by interest rate cuts.

“But life hinges around more than just debt and the encouraging global inflation news in the form of declines in commodity prices bodes well for local inflation. We may well be very near to the peak in consumer price inflation numbers and with the country’s wage bill inflating steadily, a decline in inflation should translate into a recovery in disposable income growth in real terms, possibly late in the current year, after a declining growth trend spanning back to the beginning of 2007,” says Loos.

The anticipated recovery in real disposable income growth is expected to precede a recovery in economic growth, but this is based on the assumption that although economic growth will go slower for a while, South Africa will not fall into a recession.

The information in this article is courtesy of I-Net Bridge (“Household recovery good news for property”, The Times, 11 September 2008).

Property South Africa.