South African consumers under pressure

South African consumers’ desire to borrow money is on the rise as many turn to credit to supplement their income and maintain their lifestyles despite an increasing cost of living.  

This is according to TransUnion’s Q1 2024 South Africa Industry Insights Report, which reviewed consumer spending and home loan demand. 

“Consumers’ credit appetite continued to grow despite the sustained high interest rate environment, as consumer confidence improved slightly during this quarter, along with lower inflation metrics in January and March,” TransUnion said. 

The first quarter of 2024 saw the strongest year-over-year (YoY) growth in personal loans, with a 20% increase. 

“This was the third consecutive quarter in which personal loans growth outpaced other consumer credit products,” the organisation said.

“Over the same period, retail instalment loan originations increased by 10%, and the average new loan amount increased by 14.5%.”

Generation Z, born between 1995 and 2010, were a large driver behind the growth of consumption-led products as they continue to enter the workforce and start building their credit histories.

The report explained that while clothing account volumes increased by 3.1% compared to a year ago, the average new clothing account limit increased by 27.8%, leading to outstanding balances growing by 10.6%.

Lenders are raising credit limits to meet consumers’ growing demand for more purchasing power as inflation erodes their spending ability. This allows them to buy a wider range of items on clothing accounts, including phones, appliances, and furniture.

“Growth observed in the clothing account market has been amplified by consumers facing higher living costs, which are increasing at a faster pace than their income, especially as inflation remains on the higher end of the Reserve Bank’s target range of 3% to 6%,” TransUnion said.

TransUnion’s data showed that 77% of consumers are concerned about inflation’s effect on prices for everyday goods such as groceries and fuel. Interest rates worried 55% of respondents, and another 52% said that they were concerned about remaining employed.

“South African consumers remained resilient through the first quarter of 2024, keeping up with their payments and leveraging their access to credit to maintain liquidity,” Lee Naik, CEO of TransUnion Africa, said. 

“Lenders seeking to maximise opportunity in the current economic environment will win the loyalty of resilient consumers by offering agile financial solutions that provide flexibility for their consumption needs.”  

The table below shows the strong growth in South Africa’s credit market and the increased demand from younger consumers.

“The volume of home loan originations increased by 6.7% YoY in Q1 2024, although average new loan amounts decreased by 6.2% over the same period,” the report read. 

This indicates an uptick in the more affordable sectors of the South African property market, which is partly driven by first-time home buyers.

“This is supported by a 9% YoY growth in the number of below prime home loans being originated during Q1 2024, while new home loans in prime and above risk tiers fell by 10% YoY.”

According to a report released by Lightstone, affordable housing represented 50% of registered properties and accounted for 36% of property sales in 2023. Properties valued at R750,000 or less fall under this category.

“While new loan amounts have shrunk, total outstanding home loan balances increased by 7.6% YoY, implying that existing home loan borrowers are leveraging their home equity for liquidity,” TransUnion said. 

This means that consumers are drawing on their existing home loans due to more favourable interest rates relative to the increased cost of new credit in the form of personal loans or credit cards.

At the same time, missed home loan payments have increased sharply compared to last year. 

This is a warning sign for lenders, who may need to take a more active approach in managing potential defaults from borrowers facing a payment shock due to high interest rates.

While defaults on home loans and car loans increased, delinquency rates improved across all unsecured credit products.

Lenders are prioritising lower-risk consumers for personal loans, with the number of loans granted to consumers in the prime and near-prime risk tiers increasing by 5.5% YoY. This is the third consecutive quarter in which this trend has continued.  

The company explained that lenders focussing on lower-risk personal loan borrowers have likely driven the improvement in delinquencies for this product.