South African households owe more, but own R1,2 trillion less

South African households are owning less and owing more and were R1.2 trillion poorer in the second quarter of 2022 according to the latest Momentum-Unisa Household Wealth Index.

Their wealth decreased by an estimated R1.23 trillion (R1 230 billion) to R15.75 trillion from R16.98 trillion in the first quarter to the same level as a year ago.

An increase of R39 billion in the value of outstanding household debt and a decrease of R1.19 trillion in the value of household assets combined to register the decline of R1.23 trillion in the value of household wealth.

It is estimated that outstanding household debt increased to R2.67 trillion in the second quarter, while household assets decreased to R18.42 trillion.

What does this mean for consumers?

According to Johann van Tonder, economist for financial wellness at Momentum, this will contribute to slower growth in household consumption expenditure, which in turn will adversely affect economic growth and employment if this lower level of household wealth persists.

Momentum-Unisa research shows a change of 1% in real household wealth can on average be associated with a change of 0.8% in real household consumption expenditure. A decline of 10% in the value of household financial assets was the main reason for the decrease in household wealth.

Household expenditure affects economic growth, which in turn impacts employment. Increasing household wealth in the form of rising real asset values could therefore assist in employment growth.

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Decrease due to risk aversion

Van Tonder says the value of financial assets, including pension funds and long-term insurance and investments such as unit trusts, decreased due to risk aversion caused by aggressive interest rate increases by central banks to contain high consumer price inflation that incited fears of an economic recession in major economies, which will negatively affect world economic growth.

As a result, the JSE All Share Index lost 12.3% (from the end of the first quarter to the end of the second quarter and the All Bond Index 3.7%.

These declines resulted in a decrease of R553.7 billion in the value of pension funds and long-term insurance and an even larger decrease of R776.9 billion in the value of other investments.

“On the other side of the coin, household liabilities increased by around R39 billion, mainly due to an increase in outstanding credit. About half of the increase stems from growth in mortgages (R19.2 billion).

“However, due to factors such as increasing interest rates impacting other debt uptake, the growth in household debt slowed to 1.5% in the second quarter from 2.7% in the first quarter.”

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Total household assets

Total household assets can consist of financial and non-financial assets. Financial assets comprised an estimated 63.9% of total assets in the second quarter, down from 66.3% in the first.

The largest financial asset component, households’ investments in pension funds and long-term insurance products, constituted 36.9% of total assets, lower than the 37.5% in the first quarter.

Other financial investments, such as in unit trusts, shares, and bonds comprised 17.9% in the second quarter (down from 20.7%) and deposits 9.1% (up from 8.4%).

“The declining share of the two “risky” financial assets components, pension funds and long-term insurance, as well as other investments and an increase in the “safer” deposit component, suggest that higher risk aversion contributed to the decreasing value of household assets,” Van Tonder says.

This risk contributed to a decrease of R553.7 billion in the value of pension funds and long-term insurance and an even larger decrease of R776.9 billion in the value of other investments.

The increase of R30.3 billion in the value of household deposits marginally softened the combined decline of R1.33 trillion in the value of these two components of financial assets.

“The higher risk which affected the value of financial assets accrued from mainly aggressive increases in interest rates by various central banks. Van Tonder says compared to the first quarter these increases occurred at a faster pace and in magnitude as central banks “front loaded” rate increases to contain high consumer price inflation.”

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Fears of looming worldwide economic recession

Van Tonder says these aggressive rate increases and other factors, such as the shortage of energy, incited fears of a looming world economic recession and risk aversion, which in turn caused share prices to decline and bond yields to rise.

In contrast, non-financial assets, such as residential buildings, durable goods and other non-financial assets, increased by 1.6%, limiting the decline in the value of total household assets to 6.1%.

Households’ outstanding liabilities (mostly credit) increased by an estimated R38.9 billion to R2.67 trillion, but seasonal factors and higher interest rates ensured a lower increase than the R70.2 billion of the first quarter, he says.

All the main liability categories, mortgages, vehicle and other secured loans, unsecured loans and credit facilities and other liabilities, such as municipal debt and other accounts in arrears also increased.

Momentum-Unisa estimated outstanding mortgages increased by R19.2 billion, vehicle and other secured debt by R7.4 billion, unsecured loans and credit facilities by R6.2 billion and other liabilities by R6.1 billion.

What can we see happen in the third quarter? Van Tonder says preliminary data indicates that household wealth may recover somewhat and if this happens, it can be due to a stabilisation and moderate recovery in share prices.