2022 was the year the middle class got seriously indebted as rising fuel and food prices eroded their earnings and forced them to borrow more. They now spend 66% of their income on loan repayments. South African consumers were hit by two rate hikes in the third quarter, with the benchmark interest rate 3.25% higher than this time last year. That means people with a R1.5 million home loan had to come up with an additional R3,000 a month just to cover their installments. And that was before the last 75 basis point raise…
2022 was the year the middle class got seriously indebted as rising fuel and food prices eroded their earnings and forced them to borrow more.
They now spend 66% of their income on loan repayments.
South African consumers were hit by two rate hikes in the third quarter, with the benchmark interest rate 3.25% higher than this time last year.
That means people with a R1.5 million home loan had to come up with an additional R3,000 a month just to cover their installments. And that was before the last 75 basis point hike in the repo rate on Nov. 24th.
According to the Eighty20/XDS Third Quarter Credit Stress Report, economic forces are beginning to put significant financial pressure on middle-income consumers, particularly if they have auto financing and home loans. Incidentally, this is also the group that pays the most taxes in the country.
The report highlights the impact of economic forces on South African consumers, with a particular focus on consumer credit behavior.
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Consumer segments by income
Middle-class workers represent the 4.1 million credit-active middle-income demographics and families, including 621,000 (down 40,000 from Q3 2021) who have home loans and 630,000 (down 60,000 from 2021) who have more than a loan feature vehicle financing.
These consumers are in dire financial straits, with new defaults or arrears up 19% compared to 2021 and defaults on vehicle financing up 21%.
Total vehicle financing balances equaled 55% of their home loans.
In the mass lending market, composed of the employed lower-middle class, 100,000 have home loans and fewer have vehicle financing, but 7.5 million have retail loans, 3 million have unsecured loans and 1.5 million have a credit card that they use to survive with one Increase in average installments by 41% and past due balances by 26%.
This segment has R70 billion in unsecured debt, with 1 in 25 of all unsecured loans defaulting.
The wealthiest 5% of the population are predominantly male and have more assets than any other segment, having bought mainly when interest rates are low, as shown by their total loan balance growing 10% year-on-year, which is 4% more than the population growth in this segment.
Their total home loan balances increased 11% compared to the same quarter in 2021, while their average rates increased 16%. About 1.2% of all current home loans defaulted this quarter, representing a 10% year-over-year increase in the rate of new defaults.
The segment least concerned about its finances is the affluent retirees, a group of older, credit-active and wealthy high-income ex-professionals and middle-class consumers. It’s also the only group to benefit from higher interest rates, while their average installment-to-income ratio rose 8% year-on-year to 42.3% from 39.1%.
The rate of new arrears in this group fell more than 8% in the third quarter, while their credit card loan balances rose 12%, with average rates up 7%. Their unsecured average rates increased by 10% year-on-year.
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These groups have the highest percentage of arrears
The segments with the highest percentage of defaults are Mothers of the Nation, Hustling Males, and the Mass Credit Market, with more than 50% of consumers having at least one loan in arrears. These are all lower-income segments with retail and unsecured loans.
The second group, in the 30% to 40% range, are middle-class workers, the elderly and students. Of the 75,000 personal loans that college students have, 16% default, similar to the affluent and comfortable retirees.
The number of consumers in the debt relief segment fell by 63,340 to 10.3 million and now accounts for 57.6% of all consumers with unsecured credit and 9.2% of total credit value, while 233,055 consumers earn less than R7,500 per month , are not eligible for debt relief because they have unsecured debts of more than R50,000. People earning less than R7,500 a month with unsecured debt of less than R50,000 can apply to have their debt suspended or erased under an amendment to the National Credit Act.
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Retail Sales Index
The impact of the financial distress is evident in retail sales, which slowed in the third quarter and fell 1.9% compared to the second quarter.
Eighty20’s Mall Visits Index for 20 select malls also fell 2.4% and the Dwell Time Index fell 0.2%. These malls represent 47 million visitors, up from 48 million in the previous quarter.