First-time property borrowers hit the hardest

First-time Property Borrowers Hit the Hardest

Fall in debt summonses belies what is happening ‘on the ground’, say experts
Economics Editor

HOUSEHOLDS are coming under mounting strain as interest rates climb, with people who have taken on debt for the first time likely to be hit the hardest.

Businesses are also starting to grapple with higher debt service costs, although the trend has not yet been convincingly reflected in official data.

Eyebrows shot up after figures from Statistics SA yesterday showed that civil debt summonses fell 11,6% in the year to August while civil debt judgments dropped 10,8%.

The data mainly reflect individual debt, and contrast with a 16,2% annual increase in company liquidations during the same month, which boosted the total to a three-year peak.

“From our experience, what we see in these figures doesn’t reflect what we see on the ground,” said Credit Guarantee chief economist Luke Doig. “I’m expecting a 20% increase in liquidations going into 2008.”

Doig declined to give details but said that his company, which insures business-to-business debt, had seen a “significant” rise in requests for payment extensions in the past few months.

That would put the start of the trend a year after the Reserve Bank’s first interest rate hike last year — bang in line with the view that changes in interest rates take between one and two years to be fully felt.

In the past 16 months, the cumulative increase in lending rates amounted to 3,5 percentage points, taking prime lending rates to 14%, a four-year peak.

The impact on households is hard to quantify, as growth in retail sales has remained buoyant, while the pace of private credit extension has subsided modestly.

This is baffling, particularly as the introduction of stricter lending rules in June this year has been viewed as another “quasi” interest rate hike.

Household debt as a ratio of disposable income has climbed steadily in the past four years, scaling a record 76,5% in the second quarter of this year, from 51,8% at the start of 2003.

Debt service costs as a percentage of disposable income has risen to 9,7% from 8,8% over the same period, after dipping to 6,2% late in 2003.

The ratio is high, but well below a peak of 15% late in 1998, when prime lending rates rocketed to 25,5% during a global emerging market crisis. That, along with rising income, could help explain why consumers have shrugged off rising interest rates.

But there are other theories, which lead to worrying conclusions. Standard Bank economist Danelee van Dyk says 60% of an estimated R920bn of outstanding household debt was taken on between 2003 and 2006, while prime lending rates were either falling towards or hovering at near-record lows of 10,5%.

Between March 2003 and March this year a net 1,34-million new jobs were created, suggesting there were many more people eligible for credit for the first time.

Employment among those earning between R2500 and R8000 a month — SA’s middle-income group — rose 27%, well above other income groups.

“This certainly confirms that a large part of the new debt may have been incurred by the expanding middle income group,” said Van Dyk. “They are likely to be taking the most strain in this high interest rate environment.”

Other analysts agree.

“The increase in debt levels over the past few years has been the result of more people coming on to the market,” said Hugo Pienaar, economist at the Bureau of Economic Research.

“There are clear signs that some are now feeling the pinch.”

Authored By: Mariam Isa
Published By: Business Day