Households more vulnerable to economic shocks

THE vulnerability of households to interest rate and economic shocks that could compromise their ability to repay debt has begun to rise.

FNB said its household sector debt-service index deteriorated to 5.43 on a 10-point scale in the first quarter of the year from 5.26 in the previous quarter and a low of 5.14 in last year’s first quarter.

John Loos, a household and property sector strategist, said the deterioration was reflective of weak economic conditions constraining household disposable income growth, with mildly faster household credit growth remaining at benign levels.

Loos said although the index remained in what FNB termed the “medium risk zone”, it was now trending upwards towards the higher end of this zone and the border with the “high risk zone”.

However, Loos stressed that the current level remained far better than the multi-decade high of 7.46 reached at a stage during the housing market bubble in 2006.

He said the deteriorating trend was an early warning sign.

“It serves to emphasise that in this ‘slow-to-no-growth’ economy, there exists very little room for mortgage lenders or other retail credit providers… to grow their lending noticeably without raising the vulnerability of households to interest rate hikes and economic shocks,” he said.

Loos said the decline in household sector debt-to-disposable income ratio “stalled” in the first quarter and increased to 71.7 from 71.2 in the previous quarter.

Loos said it was too early to conclude this was the end of its multi-year trend but the ratio had increasingly battled to make further downward progress in recent times.

He said a slowdown in the debt- to- disposable income ratio had increasingly been hampered since 2016 by slow economic growth and rising personal tax rates.

Loos said that while debt service risk was increasing, there had recently been signs of a mild increase in actual financial stress related to the housing and mortgage.

He said the total value of household sector mortgage arrears in the first quarter were off their lowest levels and slightly higher at 8.649 percent than the 8.399 percent in the previous quarter and the post2008/09 global financial crisis low of 8.204 percent recorded in late 2015.

But Loos said the mortgage arrears remained sharply down on the 16 percent high reached in the first quarter of 2009.

Non-performing loans for the household mortgage sector, which were defined as all loans in arrears for longer than 90 days, at 3.44 percent in the first quarter were also slightly worse than the late 2015 low of 3.11 percent of total advances, he said.

Loos said the estimates in the FNB estate agent surveys of the percentage of sellers “selling to downscale due to finan- cial pressure” had also risen broadly from the post-2008/09 low of 11 percent in the third quarter of 2015 to 14.7 percent in the second quarter of this year, the highest estimate since the third quarter of 2014.

But Loos said this level remained significantly better than the extreme level of 34 percent reached in the second quarter of 2009.

“The level of financial stress in the housing and mortgage market thus remains vastly better than the 2008/09 financial crisis period but had deteriorated mildly since 2015, which was reflective of the stagnant economy,” he said.