A guide to South Africa's economic bubble and coming crisis

A guide to South Africa's economic bubble and coming crisis

Unsecured loans, or consumer and small business loans that are not backed by assets, are the fastest growing segment of South Africa’s credit market and are essentially the country’s own version of subprime loans. Unsecured loans have grown at a 30 percent annual compounded rate since their introduction in 2007, when the National Credit Act was signed into law. Unsecured lending has become popular with banks because they are able to charge up to 31 annual interest rates, making these riskier loans far more profitable than mortgage and car loans in the low interest rate environment of the past half-decade. The unsecured credit bubble is estimated to have boosted South Africa’s GDP by 219 billion rand or U.S. $20.45 billion from 2009 to mid-2013.

Like U.S. subprime lenders from 2002 to 2006, South Africa’s unsecured lenders target working class borrowers who have limited financial literacy, which has contributed to the country’s growing household and personal debt problem. A 2012/2013 report from the National Credit Regulator showed that South Africa’s 20 million citizens carried an alarming 1.44 trillion rand or U.S. $140 billion worth of personal debt – equivalent to 36.4 percent of the GDP. In addition, household debt now accounts for three-quarters of South Africans’ disposable incomes.

Sadly, they seem to have stopped updating the data behind this widget, but for an illuminating chart, here is the old Clicks and Mortar from the Economist for South Africa.

Interestingly, house prices don't look alarming at relative to average incomes. Since this isn't a graph based on the median, it's possible that income disparity AND a credit bubble are making this chart look rational. South Africa's income disparity is among the highest in the world.

Foreign buyers buying and demoing habitable homes in violation of rules

Outcry over house demolitions breaching Foreign Investment Review Board rules

But Mr Raimondo said: “There’s certainly heritage-featured homes that are quite habitable that are being bulldozed for huge French provincials selling for multi, multi-millions, three million.

“It may well be that some of that doesn’t comply with the FIRB rules.

“It’s been going on for some time now.’’

He said it was “obvious the majority of buyers in a certain area (are) doing this”.

Chinese, Canadians, U.S. and Singapore big buyers of Australian Real Estate

Locals priced out by $24b Chinese property splurge

Wealthy Chinese buyers have purchased $24 billion of Australia housing in the past seven years, and over the next seven years an additional $44 billion will be spent on residential property, Credit Suisse estimates.

Chinese top the list of foreign investors in Australian residential property. Chinese top the list of foreign investors in Australian residential property. There was $17.2 billion worth of approved residential property investment coming in from overseas in the year June 30 2013, down from $19.7 billion in the previous period, according to the Foreign Investment Review Board.

Foreign money is roughly 5% of the entire market. Deutsche Bank economist pins high costs on low interest rates and domestic buyers. But first time buyers appear to be feeling the squeeze.

First-time buyers in February comprised less than 10 per cent of all mortgages processed by mortgage broker AFG for the first time since June 2010.

The article goes on to list the ways foreign investment could be avoiding FIRB approval.

Moving money from Shenzhen to Hong Kong on the black market

Inside China's Underground Black Market Banks

“We have a relative in Hong Kong who does business in Mainland China,” one of the Zhous said. “Once a week, he visits us to pick up Renmenbi for his import business, and in return he maintains a pool of Hong Kong Dollars for us across the border. He is family, so we trust him. We all avoid the official exchange rates, and everyone is happy.” Unless a client makes an extraordinarily request, this exchange involves about $500,000 per week, though it could be up to fivefold that amount if it is a public holiday, like during Golden Week in October.