Even the rich buckling under credit stress

Even rich South Africans are buckling under credit stress, especially those with home loan and vehicle financing.

Increasing interest rates are even stretching the budgets of well-off consumers as the repo rate reaches its highest rate since 2009.

The Eighty20 Credit Stress Report for the first quarter of 2023 conducted in collaboration with Xpert Decision Systems shows that the significant pressure consumers were feeling at the end of last year only escalated as they must deal with increasing interest rates and a weakening currency.

The report unpacks the credit behaviour of four Eighty20 National Segmentation (ENS) consumer segments that make up 78% of all credit active South Africans and 92% of all loan value. These segments are Mothers of the Nation, the Mass Credit Market, Middle Class Workers and the Heavy Hitters.

“The credit market began the year with an increase in the number of defaults and overdue balances compared to the previous quarter for the first time since Covid when the total number of people with at least one loan in default rose dramatically, but that metric had been broadly in decline ever since. The trend for total overdue balances mirrored defaulters with an increase of 3% compared to the previous quarter,” says Andrew Fulton, director at Eighty20.

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The proportion of current loan balances that went into default during the quarter increased by 17.4% over the last year and is an early warning sign for the state of credit in the country that has been in double digits for the last two quarters.

This increase is driven particularly by new defaults in home loans (27%) and vehicle financing (12%) and according to Fulton, a clear sign that even the wealthiest customer segments, Middle Class Workers and Heavy Hitters, are also feeling the pain of South Africa’s economic woes.

Home loans cause significant credit pain

He says home loans cause significant pain for consumers with a steep 27% year-on-year increase in average mortgage instalments due largely to rising interest rates.

“The 50 basis point interest rate increases in March and May brought the prime lending rate to 11.75%, increasing instalments by R4 600 per month for a R1.5 million home loan taken out mid-2021.”

Almost 99% of home loan balances are held by the Heavy Hitters (76%), Middle Class Workers (17%) and Comfortable Retirees (6%). The Heavy Hitter segment accounted for R87 billion (11% YoY) growth in balances, with Middle Class Workers’ balances shrinking by 4%, bringing the overall increase to R82 billion, an increase of nearly 8%, with average monthly instalments up 27% compared to a year ago. 

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Fulton says the home loan book for Middle Class Workers, by value and holders, has been in decline since the fourth quarter of 2021, with the total home loan book across all customers only growing by 9.7% over that period. 

In the fourth quarter Heavy Hitters experienced a 24% increase in home loan balances going into default compared to a year ago, while that figure increased further to 34% in the first quarter. Fulton says this paints a depressing picture for the retail property market where economic challenges and rising interest rates are depressing growth.

Consumers also battle to pay for vehicle credit

Vehicle financing shows a similar pattern for the Heavy Hitters and Middle Class. The loan book for vehicle financing shrank by 8% compared to a year ago for the Middle Class, with a change in rates of new defaults of 23% compared to a year ago for the 600 000 Middle Class vehicle finance holders. 

Fulton says the rate of new defaults on vehicle finance for Heavy Hitters and the Middle Class has increased consistently since the middle of last year, while the number of people with this type of loan has been dropping since the end of 2021. 

The instalment to income ratio for the Middle Class has now breached the 70% mark and it is now a real concern how these customers are able to continue paying off their vehicle debt and home loans.  Heavy Hitters currently have a 60% instalment to income ratio, an increase of (5% compared to a year ago, while the ratio is 44% for all credit active South Africans.

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Total credit card debt for the Middle Class also increased by 7% over the year, with average credit card loan balances up 8%, to more than R31 000. Average credit card overdue balances as a percentage of total balances for the Middle Class is now at 19% compared to 8% for Heavy Hitters.   

There was a sudden 20% jump in the rate of new defaults for credit card debt in the fourth quarter compared to the previous year, but in the first quarter the rate of new defaults remained stable although it was at this new higher rate. Total credit card balances showed the same trend, remaining about 12% higher than last year.

However, consumers still have appetite for credit, although it was lower than the fourth quarter. Nearly 665 000 people still entered the credit market in the first quarter with R7.9 billion in new loan value, an increase of 1.1%, predominantly from new retail accounts.

Mothers of the Nation are suffering

The Mothers of the Nation segment is taking strain according to the report as the latest unemployment figures showed that domestic workers were particularly hard hit since Covid with about 200 000 fewer jobs than a few years ago. 

Fulton says this could be due to the financial pressure the Heavy Hitters and Middle Class face, causing them to rethink domestic help. One way a homeowner under pressure could free up some money would be to clean their house and tend their garden themselves. 

Most of the 830 000 domestic workers in South Africa fall under Mothers of the Nation with its two low-income segments, the all-male Hustling Males and their female counterparts the Mothers of the Nation.

“Both are mainly unemployed or underemployed (likely in an elementary occupation) with the majority receiving government grants. Their relevance in terms of credit volume is negligible, with only 10% of the combined 13 million people holding any form of credit and total value of their loans is about a tenth of a percent of South Africa’s loan book. 

“However, for the Mothers themselves, their stress is significant. Some 96% of the value of loans for this segment is made up of retail and unsecured loans, with the default up nearly 50%. Loan balances tend to be fairly low (less than R2 000), but nearly 14% of all retail loan value goes into default every quarter, which is double the South African retail default average.”

Fulton says the credit stress in a tough economic climate gives us a dim view of the future, but when the wealthiest segment feels the pinch, it is a clear depiction of financial stress. “With this in mind, it is even more crucial that the middle to lower income segments will need to be frugal with their finances in order to work smarter with their access to credit.”