Have loan, will shop

June 8, 2021 Siyabonga Mtangana

The granting of credit to the private sector is still declining as measured by the latest private sector credit extension figures announced by the South African Reserve Bank (Sarb).

Credit extension decreased a further 1.8% in April after falling 1.5% in March, but a closer look at the figures show an interesting anomaly – consumers are out in the malls, at car dealerships and visiting estate agents with ready credit in hand.

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“We continue to see divergent trends between corporate and household credit,” says the economics team at FNB. “The decline in PSCE [private sector credit extension] is primarily due to corporate credit, which contracted sharply by 6.7% year on year in April following a contraction of 5.2% in March.

“In contrast, household credit extension continues an upward trend, growing by 4.7% year on year (3.3% in the previous month),” it says in its latest weekly economic overview.

The difference between higher household demand for credit and lower corporate debt uptake is as a result of contrasting approaches by businesses and households in response to the Covid-19 pandemic.

Households were cautious and saved money during the pandemic, while the corporate sector had to increase credit during 2020 to boost their cash flow during the stringent lockdown.

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Corporate credit spiked last year, increasing by 9.3% in April 2020 compared to April 2019. At the same time, households cut their spending and demand for new debt.

Credit growth to households slowed during most of 2020 as consumers became more wary of taking up more debt due to heightened uncertainty and job insecurity.

Thus, the latest credit extension figures for the corporate sector is measured relative to a high base and that of households from a lower base.

“In the household space, however, it is more than just a base effects story. Households are accumulating assets,” says Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano who authored the report.

Their analysis of household unsecured credit (mostly used for consumption) and secured credit (to finance assets) shows that households have been swapping consumption credit for asset-backed credit.

Their conclusion is that households are buying fixed assets, such as cars and houses, thanks to ultra-low interest rates and cheap assets, in some instances.

Up tick in house sales

“Demand for mortgages and home buying activity rose to levels last seen in 2005 to 2007,” they say. The FNB Estate Agents Survey confirms this argument, showing that activity among agents is at its highest since 2005. FNB indicates that mortgage applications are at their highest since 2007 and are exceeding expectations.

FNB puts forward several reasons for the surge in home buying and a strong housing market:

Ultra-low interest rates: Lower rates facilitated strong demand for houses by making mortgage payments more affordable, especially for those whose incomes remained intact during the pandemic.
An increase in the number of millenniums that are coming to ‘age’ to buy their own homes.
There is an incentive to own property to facilitate remote work. This is supported by the relatively stronger demand for bigger properties.
Unprecedented support from lending institutions as lenders are willing to restructure loans and offer payment holidays that prevented a major supply glut in the housing market at the height of the pandemic.
Lenders are also willing to finance a higher proportion of the purchase price.
The pandemic had a disproportionate impact on the labour market with white-collar workers largely unaffected by job losses. As a result, the pandemic benefited the home-buying market at the expense of the rental market.
Data shows a shift in household spending towards housing. Less is spent on travel and vacations, entertainment and commuting, while demand for housing, furniture and appliances increased.

New vehicles sales

The latest vehicle sales figures reiterate the demand for assets and explains the demand for new household credit.

New car sales increased by nearly 200% in May 2021 compared to May last year, while sales in the first five months of 2021 are 45% higher than the corresponding months of 2020, although still lower than in 2019.

Of interest is that the recovery in new vehicle sales was as a result of private buyers, rather than the rental car industry which is still suffering from travel restrictions. International visitors to SA has been devastated by the pandemic ad the fact that SA is seen by a high-risk destination by most countries, requiring quarantine whenever tourists return to their home countries.

Once again, low-interest rates are making new cars affordable, while the stronger exchange rate and moderate inflation are keeping new car prices in check.

The Reserve Bank has signaled that monetary policy will remain accommodative and that interest will stay low. This will continue to assist the recovery in the car industry, as well as the demand for credit for other assets.

Despite the improvement in household credit demand and, by implication, household confidence, growth in credit extension is still the lowest in decades.