IT MIGHT not feel that way, but South African households’ real net wealth increased by R300.4 billion over the first six months of this year. This dissonance - of actually being wealthier but not feeling that way - possibly stems from confusing income and wealth. Tough economic times are making it difficult for households to finance their expenses with their income, but their wealth grew because the value of their assets increased more than their outstanding debt.
According to the Momentum/Unisa Household Net Wealth Index, the purchasing power of households’ net wealth (real net wealth) increased by about R96.1bn during the second quarter of this year from the first quarter following an increase of R204.3bn in the first quarter. Unfortunately, and despite the two quarterly increases, it was still about R50bn lower than in the second quarter of last year.
Households that would have gained most are those with financial assets, such as investments in pension funds and retirement annuities. This is because the real value of financial assets contributed most to the increase in household wealth.
However, preliminary indications are that financial assets lost a large share of their increase during the third quarter, mostly because of adverse international economic developments.
Household net wealth
From the earliest of times, households accumulated assets. Little has changed over time, as today households’ ultimate financial goal is accumulating assets. For good reason, as more assets normally translates into higher net wealth, which will enable them to, among other things, improve their uniquely determined living standards over their lifetime.
The real value of their net wealth is the real value of their assets minus the real value of their liabilities. Their assets mostly consist of the values of their savings in retirement instruments, financial investments and residential properties, while their liabilities comprise their outstanding credit and other debts.
Momentum/Unisa estimates that the real net wealth of households grew by R96.1bn in the first quarter - from R7109bn at the end of the first quarter to R7205.1bn at the end of the second quarter. Over the first half of this year, the real value of net wealth increased by R300.4bn. This means their real net wealth increased by 4.4percent over the six months since the end of last year. In contrast, their real disposable income was only 0.8 percent higher, giving rise to them “not feeling wealthier”.
This growth in households’ real net wealth during the second quarter can to a large extent be ascribed to the real value of their assets increasing more than their outstanding liabilities.
The real value of household assets increased by R109.6bn, or 1.3 percent, in the second quarter (from the first quarter) to R8623.8bn.
This increase can be attributed to a better performance of financial assets, such as growth in the value of pension funds and other investments, while residential asset growth struggled to gain traction. This is corroborated by an analysis of contributions to and the performance of the instruments in which households’ financial assets are invested.
Most financial assets are either directly or indirectly (for example, pension funds) invested in listed shares, bonds and deposits at banks.
Households’ contributions to pension and group life schemes, annuities and official and private pension funds were 2.4 percent higher in the second quarter compared to the first quarter in real terms.
Households’ assets received a boost via higher returns on these contributions. During the second quarter, the FTSE/JSE All Share Index increased by 2percent in real terms and the All Bond Index by 1.2 percent.
However, residential assets did not perform that well. Although the real value of house prices as measured by the FNB House Price Index was 0.2percent higher in the second quarter compared with the first quarter, new residential investment was 7percent less in real terms compared with the first quarter.
The real value of households’ outstanding liabilities increased by R13.6bn (1 percent) to R1418.7bn in the second quarter.
The rise in household liabilities was driven by increases in the real value of outstanding credit, particularly in mortgage bonds, personal loans and credit card debt. Mortgage bonds, which comprise 58.5 percent of outstanding household credit, increased by 0.6 percent in the second quarter (from the first quarter).
Personal loans, which make up 14.4 percent of real outstanding credit was 0.9 percent higher in real terms, while outstanding credit card debt (7.2 percent of total outstanding credit) increased by 2.5 percent.