Forgive us our debt

Private Property South Africa
Kerry Dimmer

Undetermined regulations around the so-called Debt Relief Bill, Land Expropriation, and National Health Insurance are keeping frustrated and cash-strapped home-owners in a holding cycle.

South Africans have long been viewed as not being great savers, and not being able to manage debt, which was one of the major reasons why the National Credit Act was signed into law in 2005. Among the purposes, it was said to “assist over-indebted consumers to restrict their debt”. It obviously hasn’t worked as effectively as was hoped, given that here we are, some 14 years later with an approximate R1.73-trillion debtor’s book largely owed to banks and vehicle financiers, with the signing in, in August, of the National Credit Amendment Bill 2018, also known as the Debt Relief Bill.

It is estimated that 74% of the outstanding debt is credit directed at assets such as a vehicle or home loan, yet those recipients are not the individuals that will stand to benefit from the new Bill because it specifically targets low-income earners; those earning R7 500 a month or less, and who owe less than R50 000 in unsecured debt. Under the Amendment they will be entitled to apply for free debt review by the National Credit Regulator (NCR), to have their debts restructured.

This may mean interest rates will be reduced, or suspension of debt agreements of up to 12 months with an extended conditional option of a further 12 months, and debt may even be expunged in some cases. However during the debt review process, successful individuals may not access further credit and are required to undergo financial education. In all cases, the decision will negatively affect an individual’s credit record, and in the incidence of expungement this will reflect for 12 months.

The numbers

Research undertaken by Genesis, appointed by the Department of Trade and Industry (Dti), prior to the signing in of the Amendment, showed that more than nine-million consumers potentially qualify for debt relief; an estimated value of R13.5-billion to R20.7-billion. The research also showed that some 85 800 over-indebted consumers would benefit from have their debts expunged. While this is good, there are consequences, as those representing the banking sector have vociferously pointed out.

The argument is that not only will it make it harder for indebted consumers earning less than R7 500 a month to access credit because of the revised higher risk profile that the intervention creates, but it opens up the informal lending sector which leaves borrowers without regulatory protection. Such loan sharks could pick up roughly R7.7-billion in business from those looking to subsidise or replace their formal lost credit chains.

Reports indicate that the formal sector credit providers will be writing off an estimated R20-billion, and retailers will be impacted by a loss of sales of some R1.9-billion. There are suggestions in the media that such losses will need to be accounted for, and may be factored into new loan conditions. However this cannot be anticipated because the date of implementation of the Bill is unknown given that regulations need to be set and prescribed, as well as determinations of the power of the NCR.

Economic implications

Depending on those, The Banking Association of South Africa has indicated that banks may, in response, need to tighten their lending practices. This could have serious economic implications, especially on the back of the, also not clarified, Expropriation of Land without Compensation Amendment to the Constitution. This issue is currently under review by an Ad Hoc committee on the Amendment of Section 25 of the Constitution, which will be reviewing expert opinions on the Amendment, with results expected at the end of the first quarter next year.

This is an important consideration because landowners that feel threatened by the unknowns of land expropriation are questioning whether they should be settling their mortgage if investment security cannot be guaranteed. While banks are confirming that it’s business-as-usual in these trying times, these uncertainties around policies have an impact on investor sentiment and therefore economic activity is stunted.

The woes are further exacerbated by not having clarification around the National Health Insurance; how this is going to impact on the already cash-strapped consumer. I am personally aware of associates that are digging into their access bonds, their savings accounts and retirement funds already having been tapped. Some are hanging onto their businesses by a hair’s split-end, ready to sell their homes and downgrade to a rental apartment just to survive month-to-month. As someone said to me recently: “I’ve been forced over the past two years to cut my cloth according to my means, but I can’t even afford the cloth anymore.”

Property climate

Property experts can’t not be concerned; the pool of properties to market may be bigger, but the buyer pool is reduced and those that are investing are driving tough deals. For sellers in desperate circumstances it’s a hard reality accepting a figure that is considered well-below the investment they have made in their property. And its emotionally depressing having to let go of a well-loved home due to financial constraints.

For the balance, those who are managing to keep their head above water and do have a little extra for fun, it might be time to consider putting that into the home loan account, if only as a savings buffer; that is if there is anything left over after accounting for the forthcoming rise in fuel resulting from the Saudi oil drone attack!

With the repo rate remaining unchanged, as announced by the Monetary Policy Committee last Thursday, the negative sentiment prevails. A further decrease in the repo rate, no matter how small, would have stimulated more favourable conditions for the property market. Hope remains that there may be at least one more cut in the repo rate in the last quarter of the year.

And so the holding pattern continues; the housing market continues to experience prices that move very differently in different parts of the country, which is not unusual in any economic conditions. Home owners must remain reassured that historically, no matter how difficult it is to sustain through tough times, property ownership has always been a secure investment and an asset that increases in value.

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