It’s not just the middle class, top 5% feeling debt pain too

The South African middle class may be broke, but rising interest rates, a weakening rand and the impact of load shedding is affecting the wealthiest 5% of the population too.

Eighty20’s latest credit stress report shows that loans newly in default were up by 17% in the first quarter. It says this is being driven by a 27% jump in overall new home loan defaults and a 12% increase in defaults of vehicle finance accounts. It says this is a “clear sign that even the wealthiest customer segments” are feeling pain.

With average home loan repayments up 27% year-on-year – excluding the impact of the 50-basis point interest rate hike in May – this ought to be no surprise.

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Defaults on home loans held by the richest 5% are up by 34% year-on-year (y-o-y) in the first quarter, after a 24% jump in Q4. This, it says, paints “a depressing picture for the retail property market where economic challenges and rising interest rates are depressing growth”.

Strong middle class decline

This segment accounted for all the growth in total home loan balances, with mortgages held by the 4.1 million-strong middle class in decline for the last 18 months (since Q4 of 2021). These segments, together with what Eighty20 terms ‘comfortable retirees’ account for practically all home loans in the country.

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The report shows a similar trend for vehicle and asset finance. The loan book for vehicles among the middle class has shrunk by 8% y-o-y, with new defaults among the 600 000 consumers who have this type of finance up 23% in Q1. Eighty20 says the total number of vehicle loans in the market has been in decline since the end of 2021.

Of concern is the ability of middle-class consumers (especially) to service these loans. The number of new defaults is up 22% for home loans and 32% for vehicle and asset finance.

The instalment-to-income ratio breached the 70% mark (it is up 7% since last year), suggesting they are relying on credit card debt to make ends meet. Average balances are up 8% to R31 000, with average overdue balances as a percentage of total balances at 19%.

The data is even scarier among the ‘mass credit market’ – the employed lower middle class. Here, total credit card balances are up 17% since last year.

Wealthy debt load rises

For the top 5%, whose average debt load is more than seven times that of middle-class workers, the average instalment-to-income ratio has crossed 60%, up 5%. These consumers are spending an average of R21 000 on instalments.

The actual rates of new defaults among wealthier consumers remains relatively low.

For middle class consumers, this is 3.4%, while it is 1.5% for the wealthiest segment of the population.

Andrew Fulton, Director at Eighty20 says, “The number of defaults and overdue balances [is] up quarter-on-quarter for the first time since Covid. The Covid lockdown saw the total number of people with at least one loan in default rise dramatically, but that metric had been broadly in decline ever since.

“The trend for total overdue balances mirrored defaulters with an increase of 3% quarter-on-quarter for the first time since Covid.”

YoY changes in rate of new defaults (RND)

Most banks could see this problem coming and began tightening lending criteria a year ago, or more. African Bank, seemingly, noticed this later than rivals.

Even retailers have become far more selective when granting loans. Despite applications for new TFG accounts at a multi-year high of over four million, its approval rate is just 19% – less than half the 45% in 2019.

It says “the rate of new defaults (accounts three months in arrears) rose sharply in December”. This is an “early warning signal of worsening delinquencies”.