Increased borrowing slows down progress in reducing household indebtedness

John Loos, household and property sector strategist at FNB, says while the recent quarters' levels are significantly lower than the 2008 historic peak of 82.7%, the level of indebtedness remains high by South African standards.

Furthermore, the risk is that an apparent growing appetite for household borrowing, notably in the area of non-mortgage credit, may possibly be "prematurely" beginning to slow the much-needed progress in reducing the level of household sector indebtedness.

Should a recent gradual increase in household credit growth be the start of a more sustainable trend, this should be of concern, because very low interest rates by South Africa's historic standards have the ability to mask much of the household sector's financial "fragility", and much work remains to be done before the country's household sector can be deemed to be financially healthy. The ultimate rise in interest rates, not expected just yet but sure to ultimately happen, is invariably where the "financially weak" will be found out, Loos says.

Interest rate hike will be painful

"Warren Buffet's saying that 'when the tide goes out we can see who has been swimming naked' is probably most appropriate here. For now, though, 'the tide is still in', and the household sector appears to feel that it is currently in a relatively good space, compared to the recession period of 2008/9. But a big part of this is due to very low interest rates as opposed to genuine improvements in underlying financial strength, and high indebtedness levels still persist," he continues.

The concern should be that the household sector risks entering the next interest rate hiking cycle with a still high debt-to-disposable income ratio that could very quickly manifest itself in severe financial pain once more.

The first quarter household sector debt-service ratio (the cost of servicing the household debt burden - interest plus capital estimate - expressed as a percentage of disposable income) estimate of 11.4% was virtually unchanged from the previous quarter's 11.4%, due to no further interest rate cutting, and a slowing in the pace of decline in the debt-to-disposable income ratio.

If this is to be the bottom of the cycle for the debt-service ratio, it will be the highest bottom point on record, meaning that the household sector is more vulnerable to interest rate hikes than at previous cyclical bottom points.

Net household saving at zero percent

Of concern too, should be that non-mortgage household sector borrowing growth is near to 20% year-on-year, and rising. The desire to borrow and consume goes hand in hand with a very low propensity to save, and net household saving (gross saving adjusted for provision for depreciation on fixed assets) remained at zero percent of disposable income.

"Given these household financial statistics, for the household sector to come out of the next interest rate hiking cycle without 'significant pain', the magnitude of those rate hikes would probably have to be significantly smaller than the last rate hiking cycle's five percentage points' worth of total increase. With current interest rates arguably at abnormally low levels by South African standards, that could be a hazardous assumption to make," Loos says.

"Household sector borrowing growth needs to remain sufficiently subdued so that disposable income growth can out-grow it for the next few years, and take the debt-to-disposable income ratio still lower, thereby providing a greater buffer against the next phase of interest rate hiking. We should not be fooled by the effect of very low interest rates, and by a recently better-performing economy relative to 2008/9, into believing that we now have a financially strong household sector. Very significant household financial risks still exist," he concludes.