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Homeowners’ bad debt on the rise

11 October 2006

Arrears on mortgage repayments are likely to rise sharply over the next few months unless homeowners start curbing their borrowing and spending. This is the message from Standard Bank economist Elna Moolman who’s view echoes that of other market commentators who in recent weeks have warned that consumers could be heading for a credit crunch on the back of rising interest rates.  

In a Standard Bank housing review released last week Moolman says that small cracks have started to appear in consumers’ financial health due to record-high indebtedness, an all-time low savings rate and rising interest rates.  

Moolman says there has already been a marked up tick in the percentage of mortgage loans that are in arrears (for three months or more) since May this year. This is despite the fact that the latest data doesn’t capture the full impact of the recent two half percentage point interest rate increases.  

Moolman says the percentage of non-performing mortgage loans is likely to keep on rising given the expectation of more rate hikes to come and the fact that households’ savings levels consumers only buffer against rising rates — are at an historical low.  

Economists have been somewhat surprised by the continued strong growth in mortgage lending over the past few months, Absa senior economist Jacques du Toit points out that August’s growth in mortgage advances remained high at 30,3% (y-o-y). Mortgage advances have grown at record 30% since March this year.  

Du Toit says the ongoing growth in demand for credit from homeowners will be one of the factors that the SA Reserve Bank’s Monetary Policy Committee (MPC) will consider next week when deciding on the way forward for interest rates. Du Toit expects rates to rise by at least half a percentage point next week and another half percentage point in December with further hikes likely during the first half of 2007.  

However, economists say homeowners’ bad debt situation is not expected to become dire relative to previous rising interest rate cycles. Moolman says currently the percentage of mortgage loans in arrears is still at a relatively low 2,17%, which is far less than the high of 8% recorded at the beginning of 2003. she also argues that SA consumers’ indebtedness is not nearly at the same level yet as that of their American and UK counterparts. 

(Property 24, 11 Oct 2006) 

Source: Nedbank Property Talk