LOW interest rates are masking the financial fragility of South African households, which are still shouldering a heavy debt burden, First National Bank (FNB) household and property sector strategist John Loos said on Tuesday.

His view that households are more vulnerable to rate hikes than in the past is not in line with consensus, which holds that their position has improved significantly since the recession in 2009.

"Should a recent gradual pick-up in household credit growth be the start of a more sustainable trend, this should be of concern," Mr Loos said in a research note. "Much work needs to be done before the country's household sector can be deemed to be financially healthy."

Growth in household borrowing accelerated to 7,5% year on year in May after a 7,2% increase in April, Reserve Bank figures showed last week.

This pace of growth is not seen by most analysts as worrying. Household consumption is the economy's main growth engine, and a healthy pace of credit growth is widely seen as positive.

Household debt as a ratio of disposable income has declined to 74,7% from a peak of 82,7% in 2008, according to data from the Bank. Debt service costs as a ratio of disposable income have declined to 6,7% from 12,7% over the same period. The figures suggest households are paying off debt while benefiting from lower interest costs.

Mr Loos calculates debt service costs differently to the Bank - he includes the estimated cost of capital as well as the cost of interest.

By his measure, debt service costs are at 11,4%, down from a record peak of 16,3% in the third quarter of 2008.

"For the decline in the debt service ratio to be so significant, the Bank had to drop interest rates to low levels last seen a few decades ago," Mr Loos said. "It's a risky business to rely on low interest rates for a low debt servicing cost of what is still a big debt burden because ... interest rates will go up at some point."

The Bank has kept its key repo rate steady at 5,5%, a 30-year low, since November 2010.

Local markets are pricing in a rate cut before the end of the year, on the view that the Bank will ease monetary policy to support the sluggish economy. Interest rates are not expected to rise for at least a year.

Mr Loos said a cumulative increase of 3 percentage points in interest rates would lift his measure of debt service costs to 12,9%, assuming debt ratios remain the same.

"Anything higher takes the ratio past my 13% subjective point of pain," he said. "And not being able to take more than 3 percentage points' worth of interest rate hikes is perhaps cutting it a bit fine."

Cadiz Asset Management economist Adenaan Hardien has a more sanguine outlook.

"If rates go up, there will be increased costs but an increase from what is a very low debt service cost ratio ... we are still talking about levels that should be very comfortable," he said.