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Household Sector Finances: the Good News and the Bad News

FNB Home Loans household and property sector strategist John Loos reports further mild improvement on the indebtedness front, but no good news regarding the very weak saving situation, as economic and Household Disposable Income growth stagnates.

Household sector indebtedness decline remains the positive news

When people think of good economic or market news they normally think “strong growth”. But sometimes the good news lies in the positive results that come from “austerity measures”. In the case of South Africa’s Household Sector, its ability to have lowered its level of indebtedness meaningfully appears to be the good news, as it weathers the latest bout of interest rate hiking.

Mortgage lenders are the key contributor to the much-needed lowering in the Household Debt-to-Disposable Income Ratio

The good news continued in the 4th quarter of 2016 in the form of a further mild decline in the all-important Household Debt-to-Disposable Income Ratio. The reduction in this ratio is crucial to lowering the level of vulnerability of South Africa’s Household Sector to unwanted economic and interest rate “shocks”.

Stagnating economic growth, translating into slowing employment and income growth, has made it tough for the country’s Household Sector to make progress in reducing the indebtedness ratio and raising its savings rate, however.

The March 2016 SARB (Reserve Bank) Quarterly Bulletin shows the 4th quarter Household Debt-to-Disposable Income Ratio as declining slightly, from a previous quarter’s revised 78.0%, to 77.8%.

Although this is a very slight decline, it extends the cumulative progress made since 2008 to an 11 percentage point reduction. The all-time high of 88.8% in this ratio was reached in the 1st quarter of 2008.

The key contributing factor to this decline has been a significantly more conservative approach by mortgage lenders subsequent to the pre-2008 boom/”bubble” period. This has resulted in a crucial “normalization” in the size of mortgage books relative to disposable income. So, from a high of 49.2%, reached in the 1st quarter of 2008, the Household Sector Mortgage Credit –to-Disposable Income Ratio has declined even more significantly than the overall Household Sector Indebtedness ratio, to 34.8% by the 4th quarter of 2015.

This most recent level of the Mortgage Debt-to-Disposable Income Ratio is starting to become comparable with the pre-boom levels of the late-1990s.

A weak economy and slow income growth make a slow pace of household credit growth crucial

While some in the residential property industry have periodically expressed the view that new mortgage lending should grow at a faster pace, the need for a reduction in the Household Sector Indebtedness ratio, at a time when Household Economic and Disposable Income growth is pedestrian at best, limits the potential for this.

Nominal Household Sector Credit growth in the final quarter of 2015 was a mere 5.6% year-on-year, and has been on a slowing trend. Overall Household Sector Credit growth needs to remain at a pace below that, if further positive strides are to be made in reducing Household Sector vulnerability.

Household credit health still good, but some deterioration is expected

The decline in the Household Debt-to-Disposable Income Ratio over the past 8 years has been crucial, and its positive impact is arguably being felt of late when viewing various statistics relating to credit health. We frequently make the claim that the Household Sector has been experiencing mounting financial constraints in recent years, with Disposable Income growth under pressure and interest rates rising, but has not yet experienced mounting financial stress.

This is despite rising costs of servicing debt-relative to disposable income. Slowing economic growth aside. Rising interest rates have contributed to a rising Household Debt-Service Ratio (The interest cost on the Household Debt Burden expressed as a percentage of Disposable Income), from 8.5% at the end of 2013 to 9.7% by the 4th quarter of 2015.

Prime rate rose from 8.5% to 9.75% over the period (and has since risen 50 basis points further in the 1st quarter of 2016). However, the Average Interest Rate on Household Debt rose slightly faster over the period from 10.9% to 12.5% over the same period, due to the higher priced short term categories of credit growing at faster rates than the lower priced mortgage credit.

To date, despite rising interest rates and a rising Debt-Service Ratio, we have not yet seen a noticeable deterioration in key Household Sector Credit Health Indicators. As at the 4th quarter, Total Insolvencies remained at multi-year lows, and the very slight rise on the prior quarter is insignificant.

However, we are not claiming that credit health won’t deteriorate somewhat. While lower levels of household indebtedness can lower the magnitude of deterioration in credit health, it probably can’t prevent it entirely, and we would expect some deterioration with a lag, on the back of rising interest rates and therefore the cost of servicing debt.

But at present, the furthest we appear to have progressed is to a situation in 2015 where it appears that credit health stopped its prior multi-year improving trend. Through 2015 we saw no further improvement in the now high level of “Current” Mortgage Accounts, i.e. those accounts that are in good standing, which number in excess of 91% of all mortgage accounts. At 14% of total home selling, selling homes in order to downscale due to financial pressure remains around the lows of the past 2 years, after a prior multi-year decline. This does not yet represent meaningful increase, but also points to no further improvement in recent years. Other indicators of Household Sector credit health, such as the number of insolvencies, also don’t yet appear to have turned upward yet.

In short, credit health remained strong late in 2015, but we may be slowly approaching the turn for the worse in lagged response to interest rate hiking. The lowering of the Household Sector Indebtedness Ratio since 2008 has been crucial in limiting the negative impact of rate hiking, and it is desirable for this declining trend to continue.

No good news on the savings front yet

In real terms, Household Disposable Income growth also slowed in the 4th quarter, from 1.6% year-on-year in the previous quarter to 1.4%. This is still a higher growth rate than the 1% year-on-year economic growth rate, in part supported by very low consumer inflation during 2015. However, a noticeable rise in Consumer Price inflation in recent months suggests that this source of support for real disposable income growth will diminish in 2016.

A key risk, in such times where real disposable income growth is under pressure, is that the savings rate suffers, because households are normally reluctant to cut their material lifestyle.

Indeed, examining consumption expenditure and the savings rate this may well be the case. Real Household Consumption Expenditure grew year-on-year by 1.6%, slightly faster than Real Disposable Income growth, leading to a further mild deterioration in the already-dismal savings rate.

From a Net Dis-Savings Rate of -2.3% of Disposable Income in the prior quarter, this rate deteriorated to -2.4% in the final quarter of 2015. A Net-Dis-savings rate implies that the Gross Saving that exists is insufficient to cover depreciation on fixed assets owned by the Household Sector. This rate has deteriorated from -2.2% of Disposable Income at the end of 2014, and from 0% as at the end of 2009.

Therefore, whilst the Household Sector has made noticeable progress in lowering its Debt-to-Disposable Income Ratio since 2008, the same cannot be said for the other important ratio, i.e. the Savings Rate.

This is potentially a key shortcoming, given the current period of economic stagnation we find ourselves in. A sluggish economy implies slower asset price growth, the result being that year-on-year growth in the Value of Net Wealth has been very slow of late. At 4.1% year-on-year growth in the 4th quarter of 2015, Net Wealth growth is below inflation, thus declining in real terms.

This has meant the 3rd consecutive quarter of mild decline in the Household Sector Net Wealth-GDP Ratio, from 363.4% in the 1st quarter of 2015 to 345.9% in the 4th quarter.

Households thus need to think about saving more in order to compensate for weaker growth in wealth, should assets not perform as they did in better times.

Greater levels of job shedding a key near term risk for the household sector

Average Per Worker Formal Sector Labour Remuneration continued to outpace general economy-wide inflation in 2015, averaging a 7.4% year-on-year rate of increase for the 1st 3 quarters of 2016, while CPI inflation averaged near to 4.5% year-on-year for those 3 quarters.

These above-inflation average wage increases have been a recurring theme for some years, and have led to a steady rise in the Domestic Wage Bill’s share of GDP. That, in turn, translates into a shrinking economy-wide Gross Operating Surplus.

The end result of this rising Wage Bill/GDP ratio therefore appears to be labour shedding by the Commercial Sector on its way. Indeed, for the 1st 3 quarters of 2015, Formal Sector Employment had declined year-on-year by -0.7%, and we would expect more to come in 2016.

Above inflation wage increases, therefore, encourage greater inequality in the Household Sector.


Summing up, we have made noticeable progress in lowering the overall Household Sector Debt-to-Disposable Income Ratio, thereby reducing its vulnerability to interest rate hiking or economic growth “shocks”. But the Household Sector is making no progress on the savings front, and this may become a problem should we indeed be going into a lengthy period of economic stagnation where asset prices perform poorly and net household wealth battles to grow. Under such a scenario, a substantially higher savings rate would be crucial in compensating for a lack of asset price growth.

Certainly it appears like tougher times ahead for the Household Sector, with pedestrian real disposable income growth of late, and hints of labour shedding starting up, as the Commercial Sector attempts to contain a wage bill that is growing at a faster rate than the economy.

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