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Household credit growth slows

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Growth in outstanding household sector credit de-celerated slightly in December, from 4.6% year-on-year in the previous month to 4.5%. This slight slowing comes a little earlier than we had anticipated, but we had nevertheless expected that a prior acceleration in growth would be short lived, and that the SARB’s ongoing interest rate hiking would begin to contain credit growth fairly soon reports John Loos, FNB Home Loans household sector and property strategist.

The deceleration comes largely as a result of a slowing in non-mortgage credit growth, from 5% year-on-year in November to 4.7% in December. Noticeable here is a now very slow growth rate of 2.3% in instalment sales credit, reflecting a slump in vehicle sales growth along with other durable goods, the result of interest rate hiking along with a deteriorating economy’s impact on household income growth and consumer confidence.

Mortgage credit growth to households treaded water in December, at an unchanged rate of 4.4% year-on-year, after a prior rising growth trend through much of 2015.

We believe that slowing growth will be the order of the day in the coming months, especially given the SARB’s further 50 basis point interest rate hike this week, and the rising risk of a domestic recession in 2016.

A slower household credit growth is good news

Although one month does not confirm a trend change in household credit growth yet, a slower growth rate is positive news. The prior months’ acceleration in growth had begun to raise mild concerns with us, because should it have continued to rise, it may have led to an end to the multi-year trend towards a lower and healthier household sector debt-to-disposable income ratio, a positive development in recent years which has reduced household sector vulnerability to interest rate hiking considerably since 2008.

It is crucial that household sector credit growth remains pedestrian in order to lower the debt-to-disposable income ratio further, because in a weak economic environment where the possibility of recession is significant, we can’t expect much strength in household disposable income growth in the near term.

Moderate mortgage advances growth since the end of the 2000-2007 residential boom/bubble has been key to the declining trend in the household debt-to-disposable income ratio, due to the sheer size of the mortgage credit category. From a high of 88.8% in the 1st quarter of 2008, the household debt-to-disposable income ratio has declined noticeably to 78.3% by the 3rd quarter of 2015. This declining trend in the ratio has been greatly assisted by a drop in the household sector mortgage debt-to-disposable income ratio from a 49.2% peak to 35.4% over the same period.

Going forward, however, stagnant economic growth looks likely to keep income growth very slow, in turn requiring very slow household credit growth so as not to increase household sector vulnerability.


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