South African homeowners in serious trouble

South African homeowners are in deep financial trouble, with defaults on residential mortgages growing by 36% year-on-year to the end of February. 

This was revealed by the Prudential Authority in its annual report. The authority regulates the country’s banking sector and helps prepare it for any future risks to financial stability. 

One of the major risks identified by the bank was the increasing pressure consumers and businesses are experiencing. 

The increased pressure is largely driven by the rising cost of living and doing business in South Africa, with elevated interest rates compounding these challenges. 

“Persistently high inflation and high interest rates have contributed to a significant rise in consumer strain, with increases in early arrears, debt counselling inflows, and unsecured credit demand,” the regulator said. 

This has resulted in a significant deterioration in asset quality for South Africa’s banks, with the value of collateral for loans and financial assets coming under pressure. 

Given this pressure, most retail banking products, from personal loans, revolving credit facilities, and residential mortgages, exhibited significant strain. 

The performance of residential mortgages has been especially impacted by the rise in interest rates since November 2021, the annual report read. 

Total defaults on this type of loan rose 36% year-on-year to the end of February.

This increase is on the back of a sharp uptick in first-time home buyers taking up home loans due to the unusually low cost of borrowing from 2020 to the end of 2021, as the Reserve Bank cut interest rates to boost the economy during Covid. 

The repayments on a R1.5 million home have risen by R4,600 per month since the hiking cycle began in November 2021. 

The regulator said banks have reacted by working with customers to restructure their loans and are implementing risk containment measures. 

Rising defaults on residential mortgages are only part of the pain for South African households, with the rising cost of living forcing them to turn to other forms of debt to maintain their lifestyles. 

Many South Africans are also choosing to skip insurance premium payments and halt contributions to their retirement funds to survive. 

The Prudential Authority noted that many consumers are taking on more debt through credit cards and personal loans to afford basic necessities such as food and housing.  

Trade Intelligence’s Grocery Shopper Report for 2024/25 showed that 17% of all household expenditure in South Africa is spent on food alone, with housing and electricity taking up 25% of spending. 

In 2023, food inflation averaged 10.8%, following an average of 9.2% in 2022 – driving up headline inflation. 

The increases in the price of food have been compounded by electricity tariff hikes, which are 12.7% higher than last year. 

Increased fuel prices have also affected consumers, rising 17.1% in 2022 and 5.1% in 2023. As fuel is a universal input, this effectively raises the cost base of the entire economy. 

Data from FNB shows that only 17% of South Africans have no debt at all, with a quarter having loans from their family or friends. 

The bank also revealed at the launch of its Retirement Insights Survey for 2024 that there has been an increase in demand for credit cards and personal loans. 

However, banks cannot meet this demand as many clients are unable to pay off this debt, putting the banks at risk from rising non-performing loans. 

Data shows that around 9.9 million credit-active South Africans, a third of the market, have missed more than three monthly repayments or have an adverse judgment against them. 

The good news is that relief is coming. Economists predict that inflation will continue to moderate, resulting in the Reserve Bank cutting interest rates. 

They have cautioned that the cutting cycle is likely to be shallow and short, with relief expected to be minimal.