South African households’ net wealth declines by more than R200 billion in first quarter of 2018

Johann van Tonder, Financial Wellness Researcher & Economist at Momentum.

Prof Carel van Aardt, Bureau of Market Research, UNISA.

Prof. Bernadene de Clercq, Department of Taxation, College of Accounting Sciences UNISA.

The real value of South African households’ net wealth declined by an estimated R205 billion during the first quarter of 2018. In fact, more than 60% of all the gains accumulated during the second half of 2017 was erased in Q1 2018.

The main reason for this decrease can be ascribed to a reduction of R210.1 billion in the real value of households’ assets. Although household residential properties failed to deliver real growth in Q1 2018, it was mainly their financial assets which lost value. Financial assets include households’ savings in retirement funds and annuities which are mostly invested in shares of companies listed on the JSE, as well as in bonds and fixed deposits.

The decline in the real value of financial assets can be attributed to decreasing share prices, which were caused by a combination of domestic and external factors. These include fears of overheating share markets worldwide and the expectation of higher interest rates in the United States. Domestically, an increase in the VAT-rate and uncertainty about the impact of land expropriation without compensation contributed to a further decline in share prices.

Household net wealth

Momentum/Unisa estimates that the real value of households’ net wealth amounted to R7 087.3 billion at the end of Q1 2018. While this is R77.2 billion more than a year ago, the more important matter is that it declined by R205 billion (or 10.8%) from Q4 2017.

The real value of household net wealth is obtained by subtracting the real value of their liabilities (mostly their outstanding credit and other debts) from the real value of their assets (consisting mostly of the real values of their retirement funds, other financial investments and residential properties).

To obtain a sense of the magnitude of households’ net wealth, it can be expressed as a percentage of their annual gross income. This shows that household net wealth declined to an estimated 277.2% of their gross income in Q1 2018, down from an estimated 285.2% in Q4 2017 and much lower than the more than 300% in Q2 2014 (see Table 1).

Less net wealth is bad news for households as it indicates that their estimated monthly income will be insufficient to fund their standard of living in retirement, while it also means that they will have less funds available to protect themselves against emergency expenses. Under these circumstances they normally revert to additional borrowing, which increases their liabilities and thus reduces their net wealth. A higher debt burden also increases households’ monthly debt repayment obligations – which will cause either higher levels of defaults on debt repayments, or cut backs on money available for saving, insurance and consumption. This is also a trigger for bad stress, which in turn, may lead to bad health. Bad health will in turn give rise to negative income generation and net wealth growth consequences.

Although household liabilities increased slightly in Q1 2018 compared to a year ago, this was not the main reason for the sharp decline in the real value of household net wealth. Rather, the real value of household assets declined considerably, as will be discussed in the next section.

Household assets

The real value of household assets decreased by R210.1 billion to R8 492 billion during Q1 2018. This represents an annualised decline of 9.3% between Q4 2017 and Q1 2018.

The real value of households’ residential property was affected by new investments and house price growth stagnation. During Q1 2018 there was a marked slowing in the pace at which new investments were made. In fact, new investments in residential property contracted at an annualised rate of 11.8%. At the same time house prices stagnated. The FNB House Price Index was only 3.2% higher than a year ago, but in real terms it posted an annualised increase of only 0.7% in Q1 2018 compared to Q4 2017. Taking depreciation into account, these numbers suggest that the real value of household residential property remained more or less the same in Q1 2018 compared to Q4 2017.

Analysis of households’ financial assets however reveals that their savings invested in listed shares – directly or via retirement funds – lost value in nominal and real terms in Q1 2018. For instance, the JSE All Share Index (ALSI) decreased from 59 504 points at the end of Q4 2017 to 55 475 points at the end of Q1 2018. In real terms this represents an annualised decline of 28.0% between Q4 2017 and Q1 2018. The real value of bank deposits was also worth 0.6% less compared to Q4 2017. Contrastingly, the All Bond Index (ALBI) increased at an annualised rate of 28.4%. However, as most of households’ savings are invested in listed shares and deposits, this caused the sharp decline in the real value of households’ assets in Q1 2018.

International and domestic developments contributed to the decline in the real value of household assets invested in shares. Fears of overheated share prices lead to a sell-off in international markets which spilled over to the JSE ALSI. Any possibility of a recovery in share prices was prevented by other factors which not only kept share prices at lower levels, but also contributed to higher levels of volatility. These factors include an expectation of higher than expected interest rates in the United States (US) and a growing probability of a trade war between the US and other regions.

This was aggravated by home grown problems such as an increase in South Africa’s value added tax rate (from 14% to 15%), the introduction of a policy of land expropriation without compensation, and the bad financial state of some of South Africa’s state owned enterprises.

Household liabilities

Households have been incurring debt at a very slow pace for the past five years. This trend continued in Q1 2018 as the total outstanding liabilities of households was an annualised 1.4% lower in real terms (compared to Q4 2017).

This phenomenon is indicative of stretched household budgets as households struggle to come to terms with higher debt repayments in an environment of an increasing tax burden and higher prices of goods and services.

Consequently, the household debt to gross income burden continued to decline - from 55.1% in Q4 2017 to 54.9% in Q1 2018. This is more than 10 percentage points lower than the 65.9% registered a decade ago (Q1 2008).

Outlook for the second quarter of 2018

Preliminary estimates point to the real value of household net wealth remaining at Q1 2018 levels as the real value of financial assets did not recover, while the pace at which debt was incurred in Q2 2018 continued at a slow pace.

Table 1: Estimated household balance sheet variables expressed as a percentage of their gross income

Sources: South African Reserve Bank Quarterly Bulletin June 2018; Own calculations.

Note: Adjustments were effected to historical numbers due to new information received.