Johannesburg - Default risk on South African mortgages is increasing as household budgets, under strain from climbing electricity and transportation costs, face the prospect of rising interest rates over the next year.
South Africa’s biggest banks have boosted provisions for home loans that may sour to an average 28 percent of assets from 21 percent in 2011, according to RMB Morgan Stanley.
In the US, delinquent loans fell to 6.96 percent of assets in the second quarter, a five-year low, according to the Mortgage Bankers Association.
Reserve Bank governor Gill Marcus is expected to raise rates by 50 basis points in eight months and another 100 basis points by July 2015, forward-rate agreements show.
Consumers are struggling to repay debt, with almost half of those with credit having impaired records, National Credit Regulator data show, buffeted by a jobless rate at the highest level in more than a year and inflation at or above the central bank’s upper target of 6 percent for the past three months.
Residential mortgages account for more than 56 percent of lending to South African households, according to the International Monetary Fund.
“The consumer is still under pressure, with high levels of debt,” Jacques du Toit, a property analyst for Absa Group, said. “At the stage when interest rates increase, we’ll have a further negative impact on the consumer. One has to accept that defaults will start to move.”
The average price of a medium-sized South African home measuring 141m2 rose an annual 4.9 percent in September to R1.09 million, below the inflation rate for the third month, Du Toit said.
“For the rest of the year, in real terms, price growth will remain under pressure,” he added, noting that Absa saw interest rates increasing from the third quarter next year.
Marcus is having to weigh stuttering growth against accelerating inflation in Africa’s biggest economy, where consumption accounts for about 60 percent of gross domestic product. The central bank has left its key repo rate at 5 percent since a 50 basis point cut in July 2012 to support growth it estimates will slow to 2 percent this year from 2.5 percent in 2012.
While raising next year’s inflation forecast to 5.8 percent from 5.5 percent, Marcus predicted on September 27 that the consumer price index would return to within the bank’s 3 percent to 6 percent range this quarter. It would average 5.9 percent in 2013 as a depreciation in the currency boosted fuel prices.
“I don’t think rates will be hiked soon,” Dennis Dykes, the chief economist at Nedbank Group, said. “It will require the rand to weaken further, putting upward pressure on inflation.
“Traditionally when interest rates rise it is after sustained and strong credit growth and those conditions are not prevalent now.”
South Africa’s household debt to disposable income ratio increased by almost 30 percentage points from 2002 to 2009 and was at 76 percent at the end of the second quarter, the IMF said in a report this month.
A 200 basis-point, or 2 percentage-point, increase in interest rates would push the cost of servicing household debt as a percentage of disposable income as high as 14 percent from a “manageable” 8 percent, it said. That would exceed the 12.8 percent record in 1999, according to central bank data.
Banks have tightened lending standards, making it harder for borrowers to obtain mortgages, while demanding deposits of as much as 20 percent, according to Du Toit.
The value of residential mortgages increased 0.9 percent from the end of 2012 through August, after rising 2.1 percent last year, according to central bank data compiled by Bloomberg. - Bloomberg