Expect the topic of household sector indebtedness to be a key theme in 2013. Over the years, perhaps fueled by the consumer boom of last decade, we have seen a seemingly increasing obsession amongst many households over consumption and credit. This seems to be a common phenomenon in societies where things have gone well for long periods of time, and it can be argued that middle and upper income South Africa has “had it good” for a very long time, with no major wars, recessions or depressions (the 2008/9 recession being relatively short-lived when one compares it to for instance the early-1990s recession of over 2 years).
But even the relatively recent 2008/9 3-quarter long recession, and the interest rate peak of 15.5% prime rate in 2008, is fading in the memory of many. A long period of “abnormally low” interest rates by South Africa’s standards has led to a major improvement in household debt repayment performance, and this can be seen in large declines in numbers such as total insolvencies. Home loans bankers, for one, sleep a lot easier at night these days, with non-performing loans well down from the highs of 2008/9. And in the area of non-mortgage household sector credit, the growth in borrowing has steadily accelerated since early-2010 in response to renewed happier economic and interest rate times.
But “all is not well”. If low interest rates lead to improved repayment performance this does not mean that the underlying household financial frailties no longer exist. Increasingly, certain commentators are expressing alarm at the huge growth rates in certain categories of household credit. Total household sector credit growth moved to above 10% as at November, the 1st month of double-digit year-on-year growth since late-2008.
But the discussion broadened late last year. Whereas the debate had typically focused on what the level of bad debt could become should household indebtedness get too high, allegations emerged that high levels of indebtedness may even be linked to social unrest.
While links between indebtedness and strike action/social unrest may be tough to prove, there is little doubt that over-indebtedness can do a lot of harm to households, and should be kept in check. Certain studies in the UK have even started to draw a link between levels of indebtedness and mental illnesses such as stress and depression. How at risk is SA’s household sector? Relative to what, is the question, I guess.
At least by our own historic standards, though, I would say that the answer is “high”, given that the household sector debt-to-disposable income ratio is at 76%, not far lower than the 2008 historic high of 82.7% which caused much pain when interest rates hit their peak in that year. Furthermore, 2012 saw some renewed rise in the debt-to-disposable income ratio, after a few prior years of mild decline, and further household credit growth acceleration in the 4th quarter makes it likely that further increase took place in the debt-to-disposable income ratio as 2013 approached.
Our Household Debt Service Risk Index, rose for the 5th consecutive quarter in the 3rd quarter of 2012, to a level of 6.68 (scale of 1 to 10), a very high level compared to the long run average of 5.3. This, therefore, suggests that SA’s household sector is still at a relatively high level of vulnerability by our own historic standards.
Driving the Index higher was a higher debt-to-disposable income ratio of 76% in the 2nd and 3rd quarter, up from late-2011, while abnormally low interest rate levels have also helped to sustain high risk levels (very low real interest rates being viewed as a greater risk than high ones, the reasoning being that rate hiking risk is higher at the lower real levels, as well as because households tend more towards “over-borrowing” the lower the interest rates are)
The high level of household vulnerability has introduced a key policy dilemma. Arguably the most effective way to curb overall household borrowing growth is to hike interest rates. However, given the high level of household indebtedness, the initial effect of rising interest rates is to exert severe pressure on many of those households with high levels of debt, not an attractive policy option in a time when the economy is battling and unemployment is a real problem.
A key challenge is thus to find a way to reduce the household sector’s propensity to borrow, and increase its desire to save, preferably without having to have painfully high interest rates such as those experienced at certain times in the 1990s. Expect this debate, and increasing focus on the “how to achieve it” to be a key theme in 2013.
* This report was prepared by John Loos, FNB