Debt and the Property

It’s called “plastic anaesthesia”,

South Africans’ drug of choice. We go to the store, select our wants, hand over a plastic card and whoosh – we walk out with the goods, a numb smile stuck to our face.  No gut-ranching pain, no prick, not even a little tingle – that all comes much later. Perhaps “buy now, pain later” more accurately describes the process.

Household debt levels remain consistently high, at 79,8% of disposable income. And with no significant signs of abating, credit-quality improvement remains challenging.  There are two main levels of the economy – micro macro (the economy as a whole). From the proliferation of debt-counselling services and anti-stress drugs being prescribed, it would appear that we primarily need help at the micro level.

But how does such debt affect our property market?

It affects the affordability of bond repayments.

Financial institutions no longer work on a simple 25-30% of income to determine whether you can afford a bond payment. Your overall indebtedness feeds into current lending policies, guided as they are by the National Credit Act (NCA) since 2007. In addition, the recent recession has made banks more cautious. Funds used to service clothing accounts, vehicle finance, credit-card debt, child-support and alimony payments are all taken into account before determining how much you can afford to pay off on a bond.

The overall affordability of property in South Africa has improved over the past 2 years on the back of house price deflation in 2009 and continuing wage inflation but is unlikely to improve further. With relatively high stock levels, the ratio between household income and house prices is expected to remain static before notable increases in house price inflation may appear during 2011-2013. Thus, current high debt levels contribute to the constraint of real-estate sales.

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