JOHANNESBURG - 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, according to the Momentum Unisa Household Net Wealth Report.
The report indicated that real net household wealth grew by an estimated 2.5% when compared to 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).
According to Financial Wellness Researcher and Economist at Momentum, Johann van Tonder, "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," van Tonder added.
"Further good news is that the outlook for the next quarter is promising," van Tonder continued.
Preliminary indications appear to 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.
What does this mean for the people of South Africa?
van Tonder says that when the net wealth of the population of a country increases, it normally means that people can increase and sustain better living standards, now, and in retirement, which is the ultimate goal of a successful economy.
He further added, "In addition, if the wealth increases due to assets increasing at a faster pace than their debt, as was the case in Q3 2017 and not because the value of assets declined less than debt, their credibility improves. However, in order to share in the improved wealth, households need to have at least financial assets, in other words they need to save money and invest it in for example retirement funds or other investment vehicles. On a macro level it also means that the economy is better equipped to grow faster and create more jobs."
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.
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%.
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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.
van Tonder stressed for the wealth to increase in 2018, the confidence created in December must be maintained by sober policies.
He added, "Chances are good for their wealth to improve more in 2018. It should however be kept in mind that in terms of the net wealth to income ratio (see the table) of 286.1% (meaning the value of their net wealth is 2.86 times their annual gross income) is way too low to state that households are financially well. This ratio need to double to about 570% and more people need to share in such wealth (via owning financial assets via for instance employer retirement funds or annuities)."
van Tonder concluded by stating how the wealth can be stopped from dipping in the future.
He said, "South Africans’ wealth is very much dependent on what happens in the rest of the world, as well as trust in the economic policies formulated and implemented by government with the aim of making it easy and possible for companies to grow and employ. Over the past three years the world economy performed well, but we did not share in the benefits in a way we should have. This was mostly due to uncertainty caused in the domestic political sphere. Should political leadership be able to regain the trust of the people with sober policies and actions, it will lay the foundation for South Africans to do what they need to do to share in increasing wealth."
"And what they need to do is to aim at improving their financial wellness. This can be accomplished by not borrowing what they can’t afford to repay, save money for unexpected events so that they don’t have to revert to borrowing more in order to fund the unexpected event, save sufficiently for retirement and insure themselves against risks. To do this, they need to compile a budget and stick to it as far as possible. Soliciting the advice of experts such as financial advisers can assist greatly with the budgeting exercise and determining whether they are saving sufficiently. In addition, they need to make an effort to live healthier - as the level/quality of their health has a huge impact on their finances," van Tonder concluded.