Consumers buying homes and clothes on credit despite high interest rates

Consumers are still buying homes and clothes on credit despite high interest rates. This as new credit origination volumes increased during the second quarter of the year.

However, more consumers are also paying their credit card and vehicle loan debts as they prioritise access to liquidity and private mobility.

According to a TransUnion South Africa Industry Insights Report for the second quarter, lenders also seem more cautious in their risk appetite for traditional unsecured products by offering smaller average loan amounts and limits on new revolving products.

The repo rate increased again by 50 basis points in May to 8.25%, with the prime lending rate increasing to 11.75% – a 14-year high.

However, June figures began to show signs of improvement in economic conditions, with the inflation rate falling to 5.4%, supported by a drop in the unemployment rate of 0.3% to 32.6%, alleviating some financial strain in the market.

Weihan Sun, director of financial services research and consulting at TransUnion South Africa, says optimism for positive future income trends remained high, with the TransUnion Consumer Pulse Survey for the second quarter showing that 72% of South Africans expected an increase in household income in the next 12 months.

“The South African consumer credit market has grown compared to a year ago, thanks to the significant number of new accounts originated, with lender appetite widening over recent quarters. Consumer credit scores remained relatively consistent compared to a year ago, which reflects the continued resilience of South Africa’s credit-active market.” 

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More home loans, less vehicle financing

The report shows that consumers took out more home loans, while vehicle financing has taken a back seat.

Sun says originations – a measure of consumer demand and lender willingness to advance credit – for home loans grew in volume and value, with originations increasing 11.2% compared to a year ago despite the high interest rate environment.

Average new loan amounts were 16.9% higher, while outstanding balances increased 8.1% compared to a year ago. This was due to higher value loans, offset by some instances of consumers opting to make additional payment towards their home loans repayments, in response to the continued interest rate hikes.

However, account-level balances saw more consumers fall into delinquency, which is unsurprising after the multiple interest rate hikes that eroded consumers’ liquidity over the last few years.

Sun says although the current high interest rate environment has put pressure on many existing homeowners, demand for homes remained resilient as consumers continued to take advantage of the ‘buyer’s market’ created by the lower-than-inflation home price growth rate of 3.9%.

“In fact, TransUnion’s recent First-Time Homebuyer’s Study, presented at its August Financial Services Summit, revealed 72% of home loan originations were made by first-time buyers over the past two years.”

On the other hand, vehicle finance origination volumes decreased by 4.5% compared to a year ago, further aligning to findings from the Consumer Pulse Study which showed more than half (51%) of consumers surveyed had a lower appetite for vehicle purchases.

Average new vehicle finance amounts increased 7.0%, resulting in increases to outstanding balances by 5.5% and average balances by 5.8%. Delinquencies decreased by 160 basis points, reflecting South Africans’ dependence on private transport solutions as they maintained focus on paying their vehicle loans.

Sun says the lower demand for new vehicle loans was partially driven by significant increases in vehicle prices and high interest rates, making affordability a challenge in the new and used car markets.

The TransUnion VPI for new vehicle pricing increased to 6.7% (3.9% a year ago) and to 9.8% (8.3% year ago). The largest increases for used vehicles was for three-year-old vehicles, that increased by 17% compared to a year ago, with new mid-size SUVs and hatchbacks increasing by 7.4%.

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Consumers paying secured credit first

“In previous TransUnion studies into payment hierarchies that identified which credit products consumers prioritise and pay first when they are under pressure, we found that consumers place the highest priority on paying their secured lending obligations and this trend continues to hold true,” Sun says.

It was also clear from the report that consumers had a greater demand for unsecured credit products, with credit card origination volumes increasing 10.2%, with lender caution evident in lower limit extensions on new cards, which decreased 1.8% over the same period.

Growth in origination volumes was primarily driven by existing cardholders (65%) with the remaining 35% contributed by new-to-card consumers.

These new-to-card originations made up 35.5% of all new cards issued, a decline of 8.8 percentage points from the first quarter of 2019 at 44.3%. Lender caution was also evident in personal loan originations, where despite volumes increasing by 8%, the average new loan amount was lower by 14.7% over the same period. Outstanding d average balances saw modest growth of 3.9% and 2.4% YoY, respectively. Account-level delinquencies increased by 30 bps to 35.0%.

Clothing account growth mirrored the one in retail sales for textiles, clothing and footwear during the second quarter. Origination volumes increased 17.8%.

Outstanding balances grew 8.6% due to a combination of growth in new business and existing clothing account holders continuing to leverage their facilities.

“Our recent study of South African consumers’ credit graduation journeys showed that proactive engagement from lenders that includes a focus on credit education encourages consumers to build a more complex wallet by adding new credit types that support their lifestyle needs and ambitions.

“The more opportunity consumers have to access and leverage credit products to facilitate upward financial mobility, the greater the level of financial inclusion and the better the potential for economic growth,” Sun says.