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Loan data show low residential property demand

1 Aug 2011

Credit figures from the Reserve Bank on Friday showed residential property was in poor demand and distress borrowing could be driving credit extended to households.

While credit to the private sector continued to grow at a modest pace of just over 5 percent, year on year in June, and credit to households rose more than 7 percent, growth in mortgage loans was little over 3 percent.

Jacques du Toit, the senior property analyst at Absa, said household mortgage balances were up by about R600 million month on month, or a "negligible 0.1 percent in June, after rising by 0.2 percent in May from April". Outstanding mortgage balances of the household sector stood at R766.1 billion.

Du Toit said only two categories of borrowing showed strength in June. Instalment sales rose 14.3 percent and loans and advances 39.3 percent.

The first item, representing 13.4 percent of total credit extended in June, was probably due to purchases of motor vehicles, he said, although the category included loans for household furniture and appliances.

Figures from the National Association of Automobile Manufacturers of SA confirm that demand for motor vehicles was strong that month. The association said total new car sales in June exceeded expectations. At 31 440 units it showed an improvement of 4 646 new cars, or 17.3 percent, compared with the 26 794 new cars sold during June last year.

The sharp rise in loans and advances - largely personal loans and micro loans, according to Du Toit - could be due to distress borrowing. Du Toit said the item had grown to 11 percent of total loans in June from 8 percent last year.

Du Toit said the subdued growth in mortgage loans was a sign the residential property market "will remain under pressure". He said there was little chance that house prices would make meaningful gains for two to three years.

Credit is growing slowly, despite the fact that benchmark prime and mortgage rates, at 9 percent, are at the lowest level in decades. And interest rates are expected to start rising at the end of the year or early next year, which will make consumers less willing to borrow. Du Toit said the cost of servicing debt currently was 7 percent of disposable household income, compared with 12.7 percent in the third quarter of 2008 when prime was 15.5 percent.

The problem is that household debt remains high at 77 percent of disposable household income, though it has dropped back from 81 percent in the third quarter of 2008.

Jeffrey Schultz, an analyst at Absa Capital, was upbeat about growth in lending to corporates, which was negative for a long period.

"Although the year-on-year growth rate in corporate credit extension slowed marginally to 3.7 percent, from 3.8 percent in May, in level terms this component continues to show evidence of traction. In the first six months of the year corporate credit growth has risen just shy of R20bn compared with the R3.4bn contraction recorded... in the corresponding period last year."

Business Report