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The year 2022 was the year that left the middle class in serious debt, as increasing fuel and food prices consumed their earnings, forcing them to take up more credit.
They now spend 66% of their income on paying back loans.
South African consumers were hit with two rate hikes in the third quarter, with the prime lending rate 3.25% higher than this time last year.
This means that people with a R1.5 million home loan had to find an additional R3 000 per month just to cover their instalments. And that was before the latest 75 basis points increase in the repo rate on 24 November.
According to the Eighty20/XDS Credit Stress Report for the third quarter, economic forces are starting to put significant financial pressure on middle-income consumers, especially if they have vehicle finance and home loans. Incidentally, this is also the group that pays most of the tax in the country.
The report highlights the impact of economic forces on South African consumers, with a particular focus on consumer credit behaviour.
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Middle-class workers represent the 4.1 million middle-income, credit-active population with families, which includes 621 000 (40 000 less than the third quarter of 2021) who have home loans and 630 000 (60 000 less than 2021) who have vehicle finance.
These consumers are in financial distress, with new defaults or arrears increasing by 19% compared to 2021 and vehicle finance defaults by 21%.
Total vehicle finance balances were equivalent to 55% of their home loans.
In the mass credit market, which consists of the employed lower middle class, 100 000 have a home loan and fewer have vehicle finance, but 7.5 million have retail credit, 3 million have unsecured loans and 1.5 million have a credit card that they use to survive with average instalments increasing by 41% and overdue balances by 26%.
This segment has R70 billion in unsecured debt with 1 in 25 of all unsecured loans going into arrears.
The wealthiest 5% of the population are mostly male, with more assets than any other segment that they mostly bought while interest rates were low, as demonstrated by their total loan balance growth of 10% year-on-year, which was 4% more than the growth in number of individuals in this segment.
Their total home loan balances increased by 11% compared to the same quarter in 2021, while their average instalments increased by 16%. About 1.2% of all current home loan balances went into arrears in this quarter, a 10% year-on-year increase in the rate of new defaults.
The segment that is the least distressed about their finances is the comfortable retirees, a group of older, high-income credit active and asset-rich ex-professionals and middle-class consumers. This is also the only group that benefits from higher interest rates, while their average instalment-to-income ratio is up 8% from 39.1% to 42.3% year-on-year.
The rate of new arrears in this group dropped by more than 8% in the third quarter, while their credit card loan balances increased by 12% with average instalments up by 7%. Their unsecured average instalments increased by 10% year-on-year.
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The segments with the highest proportion of defaulters are Mothers of the Nation, Hustling Males and the Mass Credit Market with more than 50% of consumers with at least one loan in arrears. These are all lower-income segments with retail and unsecured credit.
The second group, in the 30% to 40% range, are middle class workers, elders and students. Among the 75 000 retail loans students have, 16% go into arrears, similar to the rate for the wealthy and comfortable retirees.
The number of consumers in the debt relief segment decreased by 63 340 to 10.3 million and now makes up 57.6% of all consumers with unsecured credit and 9.2% of total loan value, while 233 055 consumers earning below R7 500 per month do not qualify for debt relief because they have unsecured debt of more than R50 000. People who earn less than R7 500 per month with unsecured debt of less than R50 000 can apply to have their debt suspended or extinguished according to an amendment of the National Credit Act.
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The impact of financial distress can be seen in retail sales activity that slowed in the third quarter, declining by 1.9% compared to the second quarter.
Eighty20’s Mall Visits Index for 20 selected malls also declined by 2.4% and the Dwell Time Index by 0.2%. These malls represent 47 million visits, down from 48 million in the previous quarter.
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