Finance

South African households in serious trouble

South African household debt as a share of disposable income continues to rise, as a rising cost of living and high interest rates push many to take on debt to maintain their lifestyles or purchase necessities. 

This debt burden comes with increased debt-servicing costs that now make up just less than 10% of household disposable income. 

The problem is only set to get worse as credit card growth remains strong as consumers turn to debt to maintain their lifestyles amid rising prices. 

In its latest Quarterly Bulletin, the Reserve Bank revealed that nearly all credit categories extended to households increased in the third quarter of 2024. 

This took household debt as a share of disposable income to 62.2%, up marginally from 62.1% in the previous quarter. 

Households’ cost of servicing debt relative to disposable income remained broadly unchanged at 9.1% in the third quarter of 2024.

Apart from the rise in the debt burden of households, debt-servicing costs have also risen as a result of higher interest rates. 

The Reserve Bank has hiked rates by 475 basis points since November 2021 in response to rising inflation in South Africa. 

This took interest rates to a 15-year high, where the bank kept them for over a year until the first 25 basis point cut in September 2024. 

There is a significant delay between raising interest rates and the impact felt by households, with the lag period typically around six months. 

Thus, debt-servicing costs for products such as home and car loans remained low throughout 2021 and the beginning of 2022. 

Since then, these costs have skyrocketed, eating up an ever-larger chunk of household disposable income. For example, the monthly repayments on a R1.5 million home loan have risen by R4,600 in two years. 

The same lag applies when interest rates are cut – the relief is not immediate. Thus, debt-servicing costs are expected to remain elevated. 

However, relief is on the way, as the Reserve Bank has already cut interest rates by a cumulative 50 basis points. 

Economists expect the cutting cycle to continue in 2025, significantly easing debt-servicing costs in the future. 

However, some have warned that interest rates will not return to their pre-pandemic levels as structural factors drive inflation higher. 

Chief among these factors is the consistent above-inflation rise in administered prices for services such as electricity and water. 

Thus, the relief may not be as large as many expect, keeping households under significant pressure. 

In absolute terms, South Africans have over R2.35 trillion in debt, and a third of all credit-active consumers have missed more than three monthly repayments. 

This debt pile is not going to go away, even with lower interest rates. This means that a significant portion of household income will continue to go towards paying back this debt. 

Worryingly, the data also indicates that consumers are taking more debt than they can pay off and are increasingly relying on credit to purchase basic necessities. 

Debt repayments have begun to crowd out spending on goods and services, which will translate into poor economic growth as a significant portion of South Africa’s GDP comes from household consumption. 

The Reserve Bank’s data showed that this is already happening. Spending on personal transport equipment declined, while expenditure on computers, entertainment, and other durable goods has slowed so far this year. 

The bank said vehicle sales have also taken a significant hit due to interest rates remaining at 15-year highs for over a year. 

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