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Momentum/UNISA South African Household Wealth Index Q3 2016

Decline in household financial wellness continues its long-term trend

Following a decline of 2.7% in the second quarter of 2016 (Q2 2016), the real value of South African households’ net wealth declined by another 0.9% in Q3 2016. Momentum/Unisa estimated the real value of household net wealth at R7 035 billion (R7. 3 trillion) at the end of Q3 2016, down R16 billion from R7 051 billion in Q2 2013.

This decline is a continuation of a long term and volatile trend that started in 2014. Since registering R7 107 billion in Q2 2014, the real value of household net wealth failed to increase on a sustainable basis.

Household net wealth is important as it is an indicator of the state of households’ financial health, which in turn is an indicator of their financial wellness. Households can calculate their net wealth by subtracting their liabilities (outstanding debt and accounts) from their assets (value of their goods and investments). For households to improve their financial wellness, they need to increase the real value of their assets and keep their liabilities, or debt at affordable levels.

Over the past quarter households on average succeeded with the goal of keeping their liabilities/debt in check, but their assets failed to grow – a trend that’s been ongoing for more than two years.
The Momentum/Unisa Household Liabilities Index accelerated by only 0.2% in Q3 2016 (annualised seasonally adjusted real increase between Q2 2016 and Q3 2016). In addition it was 0.9% lower compared to a year ago (Q3 2015).

The muted increase in household debt can chiefly be ascribed to a reduction in instalment sales credit which is normally driven by purchases of durable goods – especially new vehicles. According to the South African Reserve Bank purchases of durable goods declined at an annualised pace of 3.8% between Q2 2016 and Q3 2016, while it was 7.8% lower than a year before. In the durable goods category purchases of new vehicles dropped sharply. The National Association of Automobile Manufacturers of South Africa reported that the number of new passenger cars sold was 16% lower than in Q3 2015. This drop in sales of new passenger cars caused instalment sales credit – the main source of vehicle finance - being 2.2% lower in Q3 2016 compared to Q2 2016.

This also contributed to the declining trend in the ratio of household debt to disposable income. In Q3 2014 this ratio, which serves as an indication of the magnitude of households’ debt burden, declined further to 74% from 74.5% in Q2 2016 and 75.8% a year ago. Another reason for the declining debt ratio can be attributed to household disposable income increasing at a faster pace than their debt.
However, the above mentioned deleveraging of households was not sufficient to prevent the ratio of household net wealth to disposable income from declining. This ratio weakened to 378.8% in Q3 2016 from 382.0% in Q2 2016 and 389.6% two years ago.

The main reason for the decline in the household net wealth to disposable income ratio can be ascribed to a decline in the real value of household assets. The real value of household assets declined at an annualised pace of 0.8% between Q2 2016 and Q3 2016, following a decline of 2.4% in the previous quarter. Momentum/Unisa estimated the real value of household assets at R8 410 billion at the end of Q3 2016, down R15.7 billion from Q2 2016.

The lower value of real household assets can be ascribed to proportionally lower contributions to retirement funds and annuities that is invested in among others companies listed on the JSE Stock Exchange, as well as a lack of growth on such investments. Momentum/Unisa analysis shows that households’ contributions to retirement funds and annuities declined to 12.1% of their estimated after tax income in Q3 2016, down from 12.2% in Q2 2016 and 12.9% a year before. In addition, the JSE All Share Index which serves as an indicator of the growth achieved on such investments, was 2.5% lower at the end of Q3 2016 compared to Q2 2016, while it was only 1.3% higher than a year before.

The above analysis shows that although households are reducing their debt in relation to their disposable income, they remain vulnerable to unexpected shocks such as they don’t have sufficient emergency funds available, while at the same time they are not saving sufficiently for retirement.