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By Roy Cokayne

Pretoria – Households, whose high debt levels are of concern to policy makers, are starting to get a grip on their finances, a prerequisite for a recovery in the residential property market.

Total new mortgage loans and readvances granted on residential property fell 31.5 percent year on year in the second quarter of this year, according to the SA Reserve Bank’s latest Quarterly Bulletin released last week.

The ratio of household debt to disposable income declined to 76.7 percent in the second quarter from 78.2 percent in the first quarter.

Jacques du Toit, a senior property analyst at Absa, said on Friday that 62.7 percent of household debt was attributable to household mortgage debt in the second quarter.

The household debt service ratio increased to 11.6 percent in the second quarter from 11.3 percent in the first, largely because of the interest rate increases in April and June.

Du Toit said the household debt service ratio was expected to peak, probably in the fourth quarter of this year.

He said: “It is definitely encouraging and an indication that the Reserve Bank’s tightening of monetary policy since 2006 has now worked through to the household sector.”

Andre Bezuidenhout, the Reserve Bank’s head of the financial stability department, admitted last month that the recent build-up of debt in households was alarming but there was no way of knowing how much worse it would get. Policy makers did not know whether overindebtedness would reach a point where defaults would threaten the financial system, he said.

John Loos, a property strategist at FNB Home Loans, said that plummeting new mortgage loans reflected the pain being experienced by residential market players.

However, Loos said the prominent share of mortgages in overall household debt meant the rapid slowdown in advances had assisted in bringing about a turn in the household debt to disposable income ratio.

This was the first step to reducing the household debt service ratio and consequently bad debt, Loos said.

He said that the debt service ratio was expected to start coming down in the last quarter of the year.

“Such a decline would be the first step towards an improving bad debt situation, which could be expected at a stage of 2009. All of this is an important building block for a residential market recovery,” he said.