Alarm bells have been sounded for South Africa’s most credit-stressed consumers, following this week’s interest rate hike by the South African Reserve Bank (SARB).
This is according to Eighty20, a consumer strategy, analytics and research company that releases a quarterly Credit Stress Report in collaboration with Xpert Decision Systems (XDS) that provides insight into South African credit behaviour.
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Eighty20’s ENS segmentation groups all South African adults into one of eight segments and 46 sub-segments.
The Q3 report outlined some worrying trends in the four most credit active segments which make up 85% of all credit active South Africans and 99.6% of all loan value.
In particular the middle-class workers, a segment of 4.1 million adults typically earning between R8 000 and R30 000 per month, are feeling the most financial strain.
Almost 75% of this segment is credit active, 30% of which have home loans and one-third of car loans in South Africa, this market segment will feel the pinch with even the smallest hike.
The latest rate hike of 25 basis points brings the prime lending rate to 10.75%, the highest it has been since 2009.
What has been most challenging for consumers is how quickly the prime rate has risen, increasing by 3.5 percentage points in the past 14 months.
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For someone who took advantage of the lowest interest rates in a generation during 2021 and purchased a R1.5m home will have seen their monthly instalments increase by nearly R3 400 in little over a year.
It is unlikely that their salary would have grown a similar 28% over the same period.
This is the reality facing 2.2 million people with a home loan in South Africa.
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If, as is likely to be the case, this household also has a car loan, those monthly payments will also be increasing, along with the fuel price.
And while inflation appears to be down from the last quarter of 2022, it is still above SARB’s target ceiling of 6%.
With children back to school this month, uniforms, books and school fees will be consuming what is left of most people’s discretionary income.
The total value of home loans moving into default in Q3 2022 for the middle-class workers increased by nearly 20% quarter on quarter.
South Africa’s most wealthy and credit active segment, the heavy hitters, is also starting to feel the pinch with a 10% increase in home loan balances moving into default in Q3.
This is only expected to get worse.
Below is a snapshot of the proportional expenditure categorically segmented based on variable household income, with financial pressure on the middle-class placing pressure on disposable income:
2015 data is the latest expenditure data available from Statistics South Africa.
Middle-class workers
The average instalment to income ratio has increased nearly 9% over the last year to 66% which means that two-thirds of the average middle-class salary goes to servicing debt.
The middle class worker is a strongly aspirational segment holding 25% of all VAF loans.
Owning property is not always achievable for these customers so instead they may opt to own a vehicle.
The 630 000 who have VAF (down by 60 000 from a year ago) are in particular distress, with the proportion of current VAF balances going into default this quarter up by 21% while average instalments increased by 11% year-on-year (R535).
For the middle-class workers who do have a mortgage, their average bond instalments are up 15% (R452) on last year and balances newly in default is up a frightening 19%.
Heavy hitters
This is the wealthiest 5% of the population, with more assets than any other segment. Their current debt load is more than three times that of the middle-class workers segment.
They have the largest span of incomes of any segment and as a result need to be divided into seven sub-segments with an average monthly income ranging from R30 000 to over R120 000.
Heavy hitters hold 52% of home loans and 54% of car loans.
Many heavy hitters bought assets on credit while interest rates were low.
Interest rate hikes together with high inflation is starting to put real financial pressure on the lower income sub-segments of this segment, who have experienced an 18% increase in home loan balances going into default over the quarter.
However, on the wealthier end of this spectrum, consumers appear relatively immune to current economic pressures with new defaults staying flat or in fact improving across some credit products.
Despite this skewed experience, overall, heavy hitters have seen an 11% increase in total home loan balances year-on-year, combined with a 16% increase in average instalments (R1 083).
Some 1.2% of all current home loan balances went into default this quarter, which is a significant 10% increase on last year.
