The effects of interest rates on Consumer Vulnerability
MBD Credit Solutions, in collaboration with Unisa’s Bureau of Market Research (BMR) have released the 2011 4th quarter Consumer Financial Vulnerability Index (CFVI). The South Africa index measures consumer perception and feelings about the four broad financial categories that impact their lives, these being: income, expenditure, savings and ability to service debt. The Consumer Financial Vulnerability Index was first incepted in 2009 in collaboration with Finmark Trust. MBD Credit solutions believes that this index is the most accurate way to gauge consumer financial capabilities. The ability to gauge consumer financial capabilities makes for very useful evaluation and planning for numerous purposes. With regards to the topic of housing it may help analyse housing affordability levels and subsequently result in better planning and innovation in housing finance.
The presentation of the CFVI 4th quarter results revealed an overall decline in Consumer Financial Vulnerability (CFV) in South Africa. Consumer Financial vulnerability is defined as the state and or feeling of being exposed financially, better explained as the experience of financial insecurity and or the inability to cope financially. Although a decline in CFV is witnessed, the majority of consumers have remained vulnerable, this is based on the fact that of all the CFVI contributing factors, only debt servicing achieved a positive change. Based on the CFVI scale which is used to measure financial vulnerability or security, the general findings indicated that consumers have achieved financial security in debt servicing but are still reasonably financially vulnerable in terms of savings, expenditure and income.
The impacts of the recent economic recession is evident in previous CFVI reports, in this one it is clear that consumers have not fully recovered from the recession to a point of financial security. What is most striking about these findings considering broader economic factors is that, a minor increase in interest rates would result in a regression back into financial vulnerability for the majority of households with regards to debt servicing, therefore exacerbating the entire vulnerability situation. Investors will watch the REPO rate very carefully in how they interpret CFVI data.
It is this environment that the South African governments’ New Housing Guarantee Fund which is to promote home loans for households in the GAP market (households with incomes ranging between R3500 and R15 000) will be operating.
A Business Report by IOL Property highlighted the response of South Africa’s banking association to the housing guarantee fund which is to be implemented from the 1st of April 2012. It is reported that, the banking association’s general manager, Pierre Venter stated that the Housing Guarantee fund would, ‘take risk out of the overall cost equation for banks, which determined the interest rate clients were charged on mortgage bond’. In other words, this reduces the risk factor of playing in the lower end of the market and therefore significantly reducing some of the consequences of interest rate hikes on financiers and subsequently consumers therefore reducing consumer vulnerability. Venter further stated that the Banks are in favour of this initiative which he says would help close the affordability gap, although not completely. He argued that the success of the programme, rests on various other factors- to this end, consumer vulnerability remains a pressing issue that the CFVI must monitor on an ongoing basis.
A strong relationship exists between consumer vulnerability (or, on the flipside, capability) and housing. A household’s capacity to enter into the kinds of credit arrangements necessary to finance new housing is fundamentally dependent on their financial capability. An over indebted household will struggle to access finance to pay for their housing. At the same time housing is a social, economic and financial asset, it plays multiple roles in household’s livelihood strategies, one of which may be to reduce consumer financial vulnerability. Certainly, home ownership is a substantial savings vehicle that is often overlooked- whether this is considered in the savings component of the Consumer Financial Vulnerability Index (CFVI) is not clear and is a question worth asking.