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Momentum/UNISA South African Household Wealth Index Q4 2017

South African Households Richer in 2017; Wealth Unequally Distributed and not all ‘Rich’ are Rich – Momentum Unisa Household Net Wealth Index (Full data for 2017)

Despite all the negativities surrounding them, South African households have something to cheer about – collectively they managed to end 2017 in a richer state compared to 2016. This is good news as the financial purpose of households is to build their wealth and in so doing, improve their chances of being Financially Well.

The latest Momentum/Unisa Household Net Wealth Index shows that South African households’ real net wealth increased by R451.6 billion (6.6%) to R7 344.3 billion over the year to the end of 2017 - the first real yearly increase since 2014.

The real value of household net wealth is often mistakenly understood as net income (income minus payments). In fact, it is the difference between the real value of assets and liabilities. Household assets mostly consist of the value of retirement funds, other financial investments and residential buildings; while liabilities typically comprise outstanding credit and other accounts.

The increase in households’ net wealth in 2017 can mainly be ascribed to a strong increase of 7.9% in the real value of households’ financial assets. Financial assets, in turn, received a boost in the second half of 2017 from the strong performances of listed shares and bonds – the instruments in which households’ retirement funds and other savings are invested. As such, the increase in the real value of household financial assets was responsible for 88.0% of the 6.6% increase in the real value of their assets.

Unfortunately, it seems as if households’ contributions to retirement funds are on a declining trend. It is estimated that (in 2017), South African households invested only 10.8% of their gross income in wealth-creation and protection instruments, including retirement funds, retirement annuities and group life schemes. This is down from the 15.0% in 2008. This negatively impacted their potential to increase the value of their assets and their net wealth.

When expressed as a percentage of disposable income, the real value of household assets increased from 438.6% at the end of 2016 to 449.8% at the end of 2017. However, this ratio is one of the lowest, when compared to the countries tracked by the Organisation for Economic Co-operation and Development (OECD). The average assets to disposable income ratio of these countries was 588% in 2014.

These ratios clearly show that asset building is a huge challenge that South African households are confronted with, in the wealth building exercise.

This is confirmed by an analysis of real household debt, which increased at a subdued rate of only 2.4% over the year to R1 386.6 billion at the end of Q4 2017. Momentum/Unisa estimates South Africa’s household debt to disposable income ratio at 71.4% at the end of 2017 – and it is much lower than the average of the OECD-countries of around 140% (in 2016).

Analysis of the distribution of household net wealth shows that although households’ real net wealth increased in 2017, not all households shared equally in this development. Financial Wellness research performed by Momentum/Unisa revealed that the top 20% household income earners own 72.2% of households’ net wealth, while the bottom 20% possess only 2.7%. This is not surprising, given income inequality in South Africa – and that net wealth is a function of how households use their income.

At the same time, though, the majority of the top 20% household income group can hardly be classified as rich. Most of these households earn between R20 000 and R45 000 per month. Given the income taxes they pay, the proportion of their income they use to repay debt (instalments), the high prices of transport, education and medical care, as well as the recent steep increases in food prices, they face a number of financial challenges – hardly the characteristics of a rich household.

Distributional analyses according to education status reveal that households with a completed tertiary education have the lion’s share of household net wealth. They have 51.6% of total income, 57.8% of net wealth and 59.2% of assets, while they are also responsible for 66.2% of all outstanding liabilities. In terms of age distribution, some 53.3% of household net wealth is in the hands of households between the ages of 45 and 54 years.

Almost 80% of household liabilities are owed by the top 20% household income group, while the bottom 60% owes less than 10% of all the outstanding household liabilities. Some 54.3% of the top 20% household income group’s liabilities are in the form of mortgages, while the bottom 20% income group’s liabilities consist of 5.5% mortgages and 94.5% other debt (mostly high interest rate-bearing loans).

Analysis of the ownership of assets by income group revealed that 65.1% of households in the bottom 20% income group’s assets are of a non-financial nature – namely durable goods, livestock and residential buildings. They don’t earn enough to contribute sufficiently to retirement annuities and other protection instruments. However, once households move into the fourth 20% income group, most of their assets are of a financial nature – consisting of cash, the value of their retirement funds and other savings and investments. Financial assets are estimated to make up 70.7% of the assets of the top 20% household income group.