Debt levels still high, says bank

By Drum Digital
18 March 2013

Consumer debt levels remain high and the decline over the past three years in the ratio of disposable income to debt has slowed, according to FNB's latest Home Loans Quarterly Report.

Released on Monday, it notes the past decade has seen "one of the largest historic shifts" in consumer debt levels.

"Not only did the household sector debt-to-disposable income ratio rise to an all-time level by 2008, but the ways in which households borrowed changed significantly too."

More and more, credit was being used to not only finance assets, such as homes and vehicles, but also lifestyle. Such practices could be risky.

The household sector debt-to-disposable income ratio had gradually declined from an all-time high of 82.7 percent in 2008, to 75 percent by the end of 2011. This was a positive trend, as the level of household indebtedness was widely seen as being on the high side.

"However, this ratio began to rise mildly in 2012, and by the end of the year was slightly higher at 75.8 percent."

This implied much work still needed to be done in terms of lowering the debt levels that funded the property and consumer boom in the earlier part of the past decade. The prolonged low interest rates had offered an opportunity to reduce household debt levels.

"However, consumers tend to be 'pro-cyclical' in their spending [and] borrowing, and generally borrow more when interest rates are low instead of using the low rates to reduce debt. Hence the 2012 resumption of a rising debt-to-disposable income ratio."

According to the report, residential mortgages make up the largest part of the household sector's debt burden, comprising 58 percent of total credit extended by banks to the household sector.

"The value of residential mortgage loans to the household sector grew at a year-on-year rate of 2.3 percent in December 2012.

"However, mortgages have lost a great deal of the share of household credit classes to the instalment sale and unsecured market, with overall non-mortgage credit to the household sector growing by a massive 23.3 percent year-on-year, as at December 2012."

The report suggests a home loan, if managed properly, is "still arguably the cheapest, most flexible way of borrowing money".

It also finds that the "holding period" of bonds -- which provides a good indication of the average time a property is held -- has increased, if the situation last year is compared with that in 2011.

For sectional title properties, the holding period for bonds cancelled in 2011 was 56 months. This increased last year to 64 months.

For so-called full title properties, the holding period increased by more than a year, from 111 months to 124 months.

"Speculative buying and selling has decreased substantially as capital growth diminished from 2008 onward. Since November 2008 -- the peak in real house prices -- nominal house price growth has been a weak cumulative 9.5 percent up until February [this year]."

According to the report, another key market trend was a decline in prominence of home loan switching.

"Transactions recorded in the Deeds Office for individuals show how home switches lost popularity in 2008, in line with the re-pricing of the market, with banks becoming less focused on gaining market share after the end of the property boom."

-by Sapa

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