South African Households’ Net Wealth Increases Despite The Economic Recession

The purchasing power (real value) of South African households’ net wealth increased by R60.2 billion over the period from the end of the first quarter of 2018 (Q1 2018) to the end of Q2 2018 – despite the economy slumping into recession.

The main reason for this improvement can be ascribed to an increase of R46.5 billion in the real value of households’ assets. At the same time, the real value of households’ liabilities (mostly outstanding debt) decreased by R13.7 billion.

The real value of household assets was boosted by an increase in the real value of households’ investments - specifically in retirement funds - which benefitted from an increase in share prices of especially the resources sector. These share prices received support from the rand exchange rate, which depreciated by almost 14% against the US$ over the period, offsetting declining commodity prices.

Household Net Wealth

Consciously or subconsciously, households in general work towards accumulating and growing their assets and reducing their outstanding debt over time - meaning that they work towards a higher net wealth position. They use instruments such as their education, skills, experience and income to acquire and grow their assets, incur debts (to among others finance asset acquisitions such as property) and then repay such debts to reduce their liabilities.

Using South African Reserve Bank numbers as benchmark, Momentum/Unisa estimates that the real value of households’ net wealth amounted to R7 200.4 billion at the end of Q2 2018. This represents a relatively small (annualised) increase of R60.2 billion from a revised R7 140.3 billion registered in Q1 2018. However, compared to a year ago, the increase is 3.4% or R235.0 billion.

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, 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. The higher their net wealth to gross income ratio, the better the chance of affording an adequate standard of living over their lifetime. This ratio increased slightly to an estimated 279.8% of gross income at the end of Q2 2018 from 278.2% at the end of Q1 2018. Although it was
somewhat higher than the 274.6% registered at the end of Q2 2017, it was still much lower than the 301.8% achieved end Q2 2014 (see Table 1).

The improvement in real household net wealth over the quarter emanated from an increase in the real value of their assets, while the real value of their liabilities decreased.

Household Assets

The real value of household assets increased by R46.5 billion (annualised) to an estimated R8 584.2 billion over the quarter to the end of Q2 2018. This represents an annualised increase of 2.2% over the quarter, following a decline of 7.8% in the previous quarter.

The increase in the real value of household assets can be attributed to real growth in the real value of households’ financial assets, especially the real value of households’ interests in retirement funds. This, in turn, was brought about by rising share prices of companies in the resources sector over the last part of Q2 2018. However, the increase in these share prices was mostly driven by the rand exchange rate which depreciated by almost 14% to R13.73/US$ over the quarter. A weaker exchange rate increases the share prices of these companies as they are either dual listed or earning their income in US$-terms.

However, the weaker rand is a culmination of several issues that combined to strengthen the US$ against other currencies, as well as factors causing the economy to contract by 0.7% in Q2 2018, dumping the economy into recession. So, the share prices increased because of risk aversion, and not as a result of positive economic growth-related factors. Consequently, the type of increase in the real value of households’ assets as experienced in Q2 2018 will not be sustainable over the long-term should depressed economic conditions continue.

The real value of households’ residential assets did not receive much support over the quarter. Indeed, house prices contracted in real terms, while real investments in the residential sector also declined. According to FNB’s House Price Index real house prices was 0.5% lower compared to a year ago and virtually unchanged compared to Q1 2018. Furthermore, real fixed capital formation in the residential sector contracted by 6.5% in Q2 2018 compared to Q1 2018. The weak state of the economy and in consumer finances, as well as uncertainty about land reform are factors that combined to the weak performance of real household residential assets.

Household Liabilities

Households’ outstanding liabilities continued to increase at a slower pace than household consumption expenditure inflation. Consequently, the real value of household liabilities declined by an annualised R13.7 billion to an estimated R1 383.7 billion over the quarter to the end of Q2 2018.

This situation – whereby outstanding household debt increases at a slower pace than inflation – is indicative of consumer finances being under pressure. This is further illuminated by an analysis of the outstanding values of the different components of household debt.

In real terms outstanding household mortgages declined by an annualised 2.1% compared to Q1 2018. This was to be expected given the decline in real fixed investment in residential property over the quarter. Real outstanding mortgages was also 0.8% lower than a year ago.

The real value of outstanding instalment credit declined by an annualised 2.0% in Q2 2018 compared to Q1 2018. As the bulk of instalment credit is used to finance purchases of vehicles, the decline is reflective of the drop in the sales of new passenger cars - which was 16.2% lower than in Q1 2018.

Real outstanding personal loans was also down at the end of Q2 2018 compared to Q1 2018, reflecting an annualised decline of 2.3%. Credit card debt was the only component that showed an increase in real terms – up 0.8% in annualised terms over the quarter. It was also 1% higher compared to a year ago.

As for other debt, the national treasury indicated that outstanding municipal accounts owed by households increased to R101.9 billion (in nominal terms) in Q2 2018.

Outlook for the third quarter of 2018

Preliminary estimates point to a decline in the real value of household assets during Q3 2018 as share prices tumbled over this quarter, while real house price growth remained negative. 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: Estimates of household balance sheet variables expressed as a percentage of gross annual income

Sources: South African Reserve Bank Quarterly Bulletin September 2018; Own calculations.
Note: Adjustments were effected to historical numbers due to new information received.

Table 2: Estimates of household balance sheet indices (2010 = 100)

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