A rise in interest costs could cause increasing household debt to threaten the stability of South Africa’s financial system, the South African Reserve Bank (SARB) said on Monday.
Household debt has been trending upward since the beginning of 2003, according to the central bank’s latest financial stability review.
The ratio of debt to disposable income rose from 60,2% in the first quarter to 61,8% in the second quarter of the year, ”and is now close to the peak of 62% recorded in the fourth quarter of 1997”.
Recent interest-rate reductions resulted in an initial decline in the financing cost of household debt, as a ratio of income, from 8,5% in the second quarter of 2003 to 6,5% in the fourth quarter of last year. It stood at 6,4% in the second quarter of 2005.
This could imply a low probability of default on debt, the SARB said, and the number of insolvencies declined by 41,5% in the year to June.
”However, the picture could change, should interest costs rise. Therefore, the increase in household debt as a percentage of disposable income needs to be monitored closely to ensure that it does not become a threat to the stability of the financial system.”
The report refers to the possibility of an increase in the default rate among mortgage holders, were interest rates to rise. Such a scenario could pose a threat to the health of the banking sector.
Property prices
The risk of stagnation or even a ”significant decline” in residential property prices cannot be ruled out.
House price growth slowed for the ninth consecutive month in July to an annual rate of 21,4%, down from 23,3% in June. The major factor contributing to the downward trend is that residential houses have become less affordable, the central bank said.
The percentage of properties sold below asking price increased from 29% in the first quarter to 44% in the second quarter of this year.
Over the same period, the average length of time properties stayed in the market increased from five to seven weeks.
But strong housing demand is expected to continue, underpinned by increases in disposable income, favourable financial conditions and structural changes in the economy.
The market is driven mainly by first-time buyers, who increased to 32% in the second quarter of 2005, compared with 26% in the last quarter of last year.
The percentage of home buyers that are investors, as opposed to homeowner occupants, had risen from 5% in 2001 to 10% last year, the report states.
Warning that investors selling off their assets to avoid or limit capital losses could exacerbate a decline in house prices, the bank said rental yields are slowly being eroded by the sharp growth rate of house prices.
Houses are becoming less affordable despite low interest rates — essentially because of escalating prices.
”The impact of previous interest-rate cuts is gradually fading away,” the bank said.
It also warned that a current private-sector lending boom needs to be monitored closely ”as they have preceded financial crises in the past”.
Sound financial system
The SARB rated South Africa’s financial system as sound.
The asset quality and profitability of banks continue to improve, and banks remain well capitalised.
”The assessment of risks facing both the household and non-financial corporate sectors, as well as the capacity of the banking sector to absorb shocks, showed that it was unlikely that the current robust health of the South African banking sector would be compromised over the medium term.”
Overall confidence in the financial services sector remains high, ”despite confidence in life insurers declining somewhat”, the review states.
The volatility of the exchange rate of the rand increased marginally in the first half of this year, but is of little concern when compared with relatively high levels recorded in 2001, 2002 and 2003, the bank said.
The Rand Merchant Bank/Bureau for Economic Research business confidence index recovered to 82 index points in the second quarter of the year, following a nine-index point decline in the first quarter.
This bodes well for investment, which is in turn favourable for financial stability. — Sapa