The sky is yet to come down crashing on us due to rising debt levels and is unlikely to do so as some commentators have predicted. However the rising consumer credit among South Africans seems to be positioned like a cancer which is slowly eating away the nation’s wealth and the retirement bases.
This picture emerges from the latest Momentum/UNISA Household Wealth Index. While showing a significant increase in South Africa’s wealth base during the fourth quarter of 2012, in q/q terms, the index also shows that household are worse off in the longer term due to the devastating 2009/09 recession. Consumer credit has increased significantly over the past few years to account for a larger portion of household liabilities and the mortgage portion has been pushed back to record lows.
The report says analysis has shown that the recession of 2008/2009 reduced the real value of household wealth significantly and the knock-on effects of this are due to be keenly felt. “Expressed in years, the recession wiped out five years of household wealth. This will have consequences for the retirement age of individuals and the contributions they are making towards their retirement funds. To realise pre-recession expectations, individuals are going to have to save and invest more and work longer”.
Due to a strong performance of the stock market, the index registered a 28.8% growth in nominal household wealth during the fourth quarter of 2012 following a 16% increase during the third quarter. “These increases contributed to the value of nominal household wealth surpassing the R6 trillion level for the first time,” said the report. This should not be surprising given the phenomenal (45.2%) annualised gain recorded by the All Share Index in 2012 and the fact that financial assets now account for 72% of the value of total nominal assets.
Momentum/UNISA estimated the nominal value of South African household assets at R7.8 trillion at the end of 2012, while liabilities approximated R1.5 trillion.
Observers are worried about the long term movements. Bernadene de Clercq, head of the Personal Finance Research Unit at UNISA’s Bureau of Market Research said, “Despite nominal increases in net wealth, real household wealth per household is not at all sufficient for purposes of independent retirement or maintaining current living standards. Too many households – especially those who are in a position to accumulate assets thanks to strong increases in their real disposable income over the past decade – apportion insufficient shares of their income towards asset accumulating investments as they rather purchase consumption goods.”
The index also captured the shifting trends in the makeup of South Africa’s wealth base. “In 1975 non-financial assets comprised 53.8% of household assets, consisting of residential assets (28.4%) and non-residential assets (25.4%). Financial assets (46.2%) comprised of cash (16.4%), investments in retirement funds and long-term insurers (13.4%) and other financial assets (e.g. direct investments in the stock and bond exchanges) (also 16.4%)”.
However, by 2012, financial assets comprised 71.9% of total assets. The share of investments in retirement funds and long-term insurers almost tripled to 38.4% and that of other financial assets to 24.5%, while cash holdings declined to 9%. The share of residential assets declined to 23.4% and that of other non-financial assets to 4.7%.
The liability base is also shifting. “In 1975 mortgages comprised 62.5% of total liabilities. Although this percentage declined substantially to just more than 40% in 1984, it gradually increased to 62.3% in 2009. However, an increase in other debt such as unsecured debt contributed to the share of mortgages declining again to 54% in 2012”.
The report noted that despite analysis of the data showing that the estimated real wealth per household was lower in 2012 compared to 1975 (the first year for which household wealth data was produced), the good news is that a turning point seems to have been reached in 1994 as real net wealth per household on average increased by 1.75% per annum for the period up to 2012.
“Nevertheless, there is still considerable concern about the health of South African households’ real wealth, as the majority of households seem not to have sufficient assets to retire financially independent”.
De Clercq said “The decrease in the real net wealth per household over the period 1975 – 2012 is a real cause for concern and policy makers, the private sector, trade unions and households themselves should all take responsibility in ensuring a larger emphasis on household asset accumulation”.
“Currently, most of the authorities’ policy focus is on income improvements whereas there is a clear and urgent need for household balance sheet improvements. Hopefully the data can contribute towards making the household balance sheet part of the policy debate, as well as being a catalyst for mindful change.”
The report said “It is important to note that the data indicate a representation of average numbers – given the unequal distribution of income in South Africa, chances are good that some households possess very high net wealth values while the majority possess net wealth values significantly lower than the averages represented here. Nevertheless, this sampling of averaged data still helps to gauge progress and a trajectory over time and, more importantly, to put into place the awareness and action needed to improve the Financial Wealth and Financial Wellness of every individual, family and business in South Africa”.