Households still credit stressed while their finances weakened

Although there were various economic highlights in the third quarter, such as more jobs, fewer credit defaults, lower inflation, a repo rate cut, and no more load shedding, South African households are still credit stressed while their finances also weakened in the third quarter.

The latest Credit Stress Report for the third quarter, compiled by Eighty20 and XDS, shows that the number of credit-active individuals continued to increase by 1.4% year-on-year, alongside a modest 1% growth in credit products.

The third quarter saw more than 900 000 new entrants to the credit market, signalling expanded access to credit. The total loan balance is now R2.47 trillion, up by roughly R47.6 billion, while credit card balances grew by only 6%.

While there has been a significant increase in application volumes for debt counselling over the past four years, there were only 177 000 applications last year in a sector where there are more than 20 million credit-active people, with about 43% of them in arrears on one or more loans.

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Total overdue balances of R194 billion show how credit-stressed households are

Total overdue balances are sitting at R194 billion (8% of the total outstanding debt), which has grown by a modest R4.7 billion in the year. Credit cards and home loans are the only two loan products that showed significant growth in overdue loan balances, with overdue balances on home loans up 23% and credit cards up 9%.

Andrew Fulton, director at Eighty20, says the continuing growth in credit card and retail loan balances, alongside the increase in overdue balances, suggests consumers use these products extensively to cope with financial challenges, such as increasing prices and stagnant salaries.

“The data underscores a growing dependence on high-interest, unsecured credit products in a challenging economic environment.”

However, Fulton says, on the positive side, the percentage of people in credit default is down more than 8% over the last year and has been dropping fairly consistently for three years. The proportion of loans in good standing (64.5%) was higher in the third quarter than in the first quarter of 2020, before Covid-19.

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Growing concentration of credit value among a small group of households

The latest data highlights a growing concentration of credit value among a smaller group of individuals. Total outstanding loan balances have experienced a compound annual growth rate of 5% since 2021, but only 1.4% in the number of credit-active individuals.

Home loan balances are growing at a rate of nearly 50 times that of home loan holders since 2021, while credit card balances are growing at a rate that is 11 times that of credit card holders. Among the Eighty20 segments, the Middle Class and Heavy Hitters dominate credit markets, holding 93% of total home loan value and 80% of total credit card balances.

“Despite their relative financial strength, these groups face alarmingly high installment-to-net-monthly-income ratios, underscoring the precarious nature of their debt obligations. This trend highlights vulnerability even among wealthier segments, where high debt repayment burdens can quickly become unsustainable, leaving little room to absorb financial shocks,” Fulton says.

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Precarious financial situation for households

He points out that despite credit card balances rising more than 30% since 2021 and overdue balances reaching nearly R200 billion, there is a shockingly low percentage of South Africans in debt counselling.

“When a loan is in default, it means that it is more than three months in arrears. That means of South Africans in default, about 2% apply for debt counselling and of those that apply, nearly 90% are granted debt review, but only 22% see it through to the finish.”

While some economic indicators in South Africa are currently more positive than at any time in recent history, the period since the COVID-19 pandemic has seen many South Africans significantly increasing their credit holdings, Fulton says.

“This expansion of credit, combined with inflationary pressures and slower-than-expected wage growth, created a precarious financial situation for many individuals. Debt levels have surged while disposable income has remained stagnant or even decreased for a large portion of the population.”

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Household finances weakened according to Reserve Bank

According to the Reserve Bank’s Financial Stability Review for the third quarter, household finances weakened, hurt by slower income growth and stagnant employment. Real personal disposable income grew by 0.6% compared to the second quarter, slowing from 1%.

Isaac Matshego Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, point out that employee compensation recovered off a low base, but other income, such as profits, rent, interest, and dividends, lost momentum.

Real compensation increased by 0.1% compared to the second quarter after shrinking by 0.4%. Khosa and Weimar say the boost likely came from lower inflation.

“Employment data on the third quarter were murky. While the quarterly Labour Force Survey showed a 1.1% increase in formal sector employment, the Quarterly Employment Statistics, which surveys companies directly, reported a 1.2% decline in formal employment over the same period.”

They also point out that the softening in household finances led to slower growth in consumer spending, which grew by 0.5% in the third quarter, down from 1.2% in the second quarter.

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Household debt ratio of 62.2%

According to the Review, the household debt-to-income ratio was almost unchanged at 62.2% after dropping to 62.1% in the second quarter from 63% in the first quarter. Debt accumulation grew slightly faster than nominal income, while most credit categories increased as households used credit to finance essential spending and debt affordability increased somewhat after the first interest rate cut in September.

The household debt service cost to disposable income ratio was unchanged at 9.1%. However, Khosa and Weimar say that it is encouraging that household balance sheets improved further, with net wealth levels increasing to 409% of disposable income, up from 395% in the second quarter.

“The market value of total assets outweighed the rise in total liabilities. The rebound in share prices and the gradual recovery in house prices supported the market value of assets.”

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Room for improvement in fourth quarter for credit-stressed households

The Nedbank economists say household finances will likely improve in the final quarter of 2024 and throughout 2025 as lower inflation will boost real personal disposable income and falling interest rates will reduce debt service costs.

“The cyclical upturn in response to easing monetary policy should also lift house and equity prices, contributing to stronger balance sheets and helping to restore financial health. If used to reduce debt, the withdrawals from the two-pot retirement system could also help restore consumers’ financial health. These will gradually free more funds for discretionary spending.”