Debt service ratios still too high for residential recovery

A calculation by John Loos, the household sector strategist at FNB, shows why the residential property market is going nowhere.

Loos says the average cost to households of servicing their debt was equal to 11.5 percent of their disposable income in the third quarter - the figure includes interest plus capital repayments.

This is way down on the "painful all-time high 2008 peak of 16.3 percent", he says. In the interim, benchmark prime and mortgage rates have fallen from 15.5 percent to 9 percent.

But Loos points out that if this ratio represents a lower turning point in the current cycle, it would be the "highest bottom turning point in history".

And he warns: "It would probably be desirable for the household sector to continue to further reduce its debt-to-disposable income ratio further."

In his view, a debt service to income ratio of 13.5 percent represents "an acceptable maximum at the peak of the cycle".

When the ratio is higher, the situation becomes "painful" for households and for lending institutions.

"That means the household sector probably only has room for what would be a very mild interest rake hiking cycle before severe pain sets in," he says.

Without doing the precise mathematics, households have apparently reached this conclusion as well.

Household credit growth slowed from 6.6 percent year on year in the second quarter to 5.3 percent in the third.

And, in October, mortgage loans - both residential and commercial - rose only 2.1 percent year on year.

The slowing trend is reflected in a recent contraction in house prices.

Standard Bank said last week the median house price fell by 1 percent year on year, last month, after a contraction of a half percentage point in October.

The figure is based on the "assessed values of those houses for which mortgage finance was approved by Standard Bank".

Business Report

Posted at 09:16AM Dec 13, 2011 by Editor in Residential  |  Comments[3]