Homes to fold on rates pressure
Articles about home loans / property in South Africa > Homes to fold on rates pressure
Johannesburg - South African households and the residential property market won't be able to handle much more of an increase in interest rates, warns an FNB economist.
Prime rates need only rise to 18% to inflict the same financial pain to consumers they did when rates surged to 25.5% in 1998, said FNB property strategist John Loos in a report released on Monday.
The performance of the residential property market could be equally negatively affected, says Loos.
That implies that an already depressed housing market - which has seen sales volumes drop by around 30% in the first quarter of 2008 (year-on-year) and house-price growth slow to 6.8% in April (Absa figures) - faces an even gloomier outlook if rates continue to rise.
Absa figures show that back in 1999, house price growth dropped to below 5%. At the time, most banks also reported a sharp rise in property repossessions as homeowners struggled to meet higher bond repayments.
According to SA Reserve Bank figures the percentage of home loans that were in arrears for more than three months in 1999 was around 9%.
Arrears dipped to less than 2% by 2005 but have steadily increased again to more than 3%.
Loos concedes that some economic conditions are different today than they were in the late nineties, which makes it difficult to make exact comparisons.
He nevertheless believes that consumers' "pain threshold" to weather higher interest rates is far lower now than it was in the nineties given the higher level of current household indebtedness.
Loos points out that in late nineties household debt-to-disposable income ratio was at the 55% to 60% level. That has recently jumped to close to 80%.
More worrying though is the increase in the household debt-service ratio, which Loos maintains is more closely linked to residential property performance than the debt-to-disposable income ratio.
The debt servicing cost ratio is currently at around 11%, the highest level since 1999 when the ratio peaked at around 14%.
Loos argues that although the rising cycle of debt servicing costs still appears normal by historic standards, it is way above the 6.3% low recorded end-2003.
Loos says a normal debt cycle would appear to be where the debt-service ratio peaks at around 12%, as happened in 1986, 1990/91 and again in 1997.
In 1998 the debt-service ratio jumped to close to 14%,which Loos regards as abnormally high. That was short-lived with the SARB dropping rates within two months by 725 basis points.
Loos maintains that if interest rates are hiked for the last time this year by 50 basis points in June, SA would probably have a very normal peak in the debt-service ratio cycle at just above 12%.
"But if rates go up to around 18% by the end of 2008, the debt-service ratio will rise to around 14%, conflicting a similar level of financial pain on households to what it did in the 1998 interest rate shock when rates surged to 25,5%."
Loos says for SA households to get back to a debt-service ratio of around 6.5% would require a prime rate of 8% by year-end, a likelihood that he refers to as the "impossible scenario".