South African households in serious trouble

Debt as a share of household disposable income is rising in South Africa. Coupled with elevated interest rates, this spells trouble for consumers, who are already struggling to pay off their debts.

This comes when consumer spending is declining, with household consumption of durable goods declining by 1.6% in the first quarter of 2024. 

The Reserve Bank detailed the financial pressure South African consumers are experiencing in its latest Quarterly Bulletin. 

The bank said high interest rates, weak consumer demand and lower disposable income dominate the current economic environment. 

This has been compounded by declining business confidence, which has resulted in companies spending less, limiting wage increases, and cutting back on hiring. 

However, there are signs this is beginning to shift, with confidence in the economy rising to a two-year high due to greater certainty about forming a new government. 

This shift will not save consumers, with businesses predicting an uptick in economic prospects in only six months. 

In the meantime, consumers have begun to rely increasingly on debt to maintain their lifestyles and, in some cases, to purchase basic goods. 

The Reserve Bank’s data showed that nominal household debt increased further in the first quarter of 2024 as most categories of credit extended to households increased. 

Household debt as a share of nominal disposable income increased to 63.3% in the first quarter of 2024 from 62.2% as the increase in household debt exceeded that in nominal disposable income. 

The net wealth of households also decreased in the first quarter of 2024 as the value of total assets decreased while liabilities increased. 

The decline in total assets was due to the lower market value of equities, while the value of housing stock increased slightly. 

Consequently, the ratio of net wealth to nominal disposable income decreased from 393% in the fourth quarter of 2023 to 390% in the first quarter of 2024.

South Africans have over R2.35 trillion in debt, of which over half is tied up in mortgages. 

Data from Trade Intelligence shows that over a third of all South Africans with debt have missed more than three monthly repayments. 

This indicates that consumers are taking more debt than they can pay off and are increasingly relying on credit to purchase basic necessities. 

While South Africans’ overall debt burden has grown, so has the cost of servicing this debt. The Reserve Bank said debt repayments comprise over 9% of all household expenditure. 

As the bank has raised interest rates to 15-year highs, South Africans with mortgages, car loans, and credit cards have seen their repayments skyrocket. 

The DebtBusters Debt Index for the first quarter of 2024 showed that South Africans earning over R20,000 per month are seeing their debt levels shoot up. 

It also showed that debt repayments have hit record highs due to rising debt levels and high interest rates. Households now spend two-thirds of their income paying off debt.

DebtBusters said the debt-to-income ratio for people taking home more than R20,000 per month is 127%, while it is 172% for those earning R35,000 or more. These ratios are at or close to the highest ever.

This has begun to crowd out household expenditure on goods and services as a greater portion of disposable income goes towards paying off debt.

For example, its data showed that spending on personal transport equipment declined, while expenditure on computers, entertainment, and other durable goods slowed in the first three months of 2024. 

Vehicle sales have taken a significant hit from interest rates remaining at 15-year highs for over a year. 

The bank said passenger vehicle sales continued to decline at the beginning of the year due to higher rates and weak demand. 

Sales data from Naamsa shows that new vehicle sales have declined by over 10% compared to a year earlier, with luxury brands coming under pressure.