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Momentum/UNISA South African Household Wealth Index Q3 2017

At last some good news for South African households as net wealth breaks its declining trend in the third quarter of 2017

Following six consecutive quarters of negative year over year growth, the real value of South African households’ net wealth increased strongly in the third quarter of 2017 (Q3 2017). Real net household wealth grew by an estimated 2.5% compared to Q3 2016. This means that the real value of household net wealth was an estimated R175.6 billion higher than a year ago.

The real value of household net wealth is the difference between the real value of households’ assets (consisting mostly of the real values of their retirement funds, other financial investments and properties) and their liabilities (mostly the value of their outstanding credit and other debts).

The improvement in households’ net wealth provides much needed relief to consumers whose financial situation deteriorated steadily over the past three years. A higher tax burden, coupled with increasing prices and stable debt service costs gradually eroded their income available for spending and saving. As such, households’ ability to cope with emergencies and save for retirement declined at a steady pace, which in turn had a negative impact on their Financial Wellness.

Further good news is that the outlook for Q4 2017 is promising. Preliminary indications point to another increase in the real value of household net wealth. This can be ascribed to strong growth in the value of households’ financial assets (predominantly investments in retirement funds) and subdued growth in household debt.

Household Net Wealth

Momentum/Unisa estimates that the real value of households’ net wealth amounted to R7 234 billion at the end of Q3 2017. This is about R221.7 billion more than a quarter before (in Q2 2017) and R175.6 billion higher than a year ago (Q3 2016). This is also a new high point for households’ real net wealth, surpassing the previous record which was set in Q1 2015.

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 increased to an estimated 286.1% of their gross income – up from the 279.8% a quarter ago and 284.7% a year before. However, it is still some distance away from the 303.8% registered in Q2 2014 (see table 1).

The increase in the real value of household net wealth in Q3 2017 can be ascribed to a substantial increase in the real value of household assets, which outpaced the small increase in the real value of their liabilities.

Household Assets

Over the past three years the real value of household assets declined as a percentage of their gross income - from 363.0% in Q2 2014 to 335.0% in Q2 2017. This can be attributed to mostly the decrease in the real value of households’ financial assets - specifically the real value of their retirement funds, which mainly consist of investments in listed shares and bonds. This decline made it more difficult for households to cope with emergencies and maintain their current standard of living in retirement.

However, the real value of household assets increased by an estimated R226.3 billion in Q3 2017, taking the total value to an estimated R8 622.6 billion. It was also R185.9 billion more than a year ago. This strong increase can be attributed to a good performance of the real value of households’ financial assets, specifically their investments in retirement funds. The increase in the real value of their financial assets was driven by an outperformance of their investments in listed shares. For instance, the real value of the JSE All Share Index (ALSI) was 7.1% higher in Q3 2017 compared to Q2 2017, while the respective increases in the real All Bond Index (ALBI) and real bank deposits were 3.2% and 2.3%.

The strong performance of households’ financial assets in just one quarter (Q3 2017) was sufficient to wipe out the losses sustained since the beginning of 2015. However, notwithstanding this good news, it also means that the real value of household assets is now just at the same level as in Q1 2015 - and that no growth was achieved since then. And for households’ Financial Wellness to improve, strong asset growth is needed.

Household Liabilities

In contrast to the strong performance in the real value of household assets during Q3 2017, the real value of their liabilities increased at a very subdued rate. Momentum/Unisa estimates the real value of household liabilities (outstanding debt and accounts) at R1 388.6 billion at Q3 2017. It is only R4.6 billion more than in Q2 2017 and R10.4 billion more than a year ago.

The ratio of household liabilities as a percentage of their gross income continued its declining trend since the highs it reached in 2012, signifying that their gross income is increasing at a faster pace than their liability commitments. The ratio declined to 54.9% in Q3 2017 from 55.2% in Q2 2017 and 55.6% in Q3 2016.

However, indications are that household debt became a bit more affordable in Q3 2017 compared to the previous quarter. This suggests that the rate at which households are incurring debt might increase over the coming quarters.