Middle-class debt trap

2012-11-03 12:03

Group accounts for R600bn worth of household debt

Declining increases in income, high levels of debt repayment, an increasing tax burden, and escalating electricity and transport costs are all conflating to create a vice-like squeeze on the pockets of the middle class, which account for 60% of South Africa’s household debt despite representing only 25% of the population.

According to Dr Penelope Hawkins of economic policy and research company Feasibility, the lion’s share of debt has gone to middle-income South Africans earning between R8 233 and R22 779 per month.

The middle class accounts for R600 billion worth of household debt, of which only 40% is made up of mortgage bonds.

The rest is money owing on cars, credit cards, personal loans and overdrafts.

Speaking at a recent summit on indebtedness, Hawkins said that between 2000 and 2010, personal loans quadrupled in value while debt related to credit and store cards tripled.

In comparison, mortgage debt has only doubled over that period.

In contrast, lower-income earners who make up 65% of the population account for only 15% of total household debt. Higher-income earners, who make up only 10% of the population, account for 30% of the debt.

However, the bulk of their debt is in mortgages.

“Credit suppliers are all targeting the same 25% of customers,” said Hawkins, who added that the middle class, who are under increasing pressure, do not benefit from any government relief such as social grants or RDP housing.

In fact middle- to upper-income earners are carrying an increasingly higher tax burden, with the latest tax statistics showing that personal income tax has increased as a percentage of total taxes from 29.5% of total tax revenue in 2007/08 to 33.7% in 2011/12.

“Salaried employees cannot do effective tax planning, which is why tax is one of the biggest concerns for these consumers,” says Bernadine de Clercq, head of Unisa’s personal finance research unit.

Speaking at the Joint Credit and Over-Indebtedness Summit, De Clercq said the current debt figures were understating the real financial situation of many households.

Statistics provided by the National Credit Regulator relate only to credit agreements and not outstanding bills such as municipal accounts, medical bills and school fees.

De Clercq says Unisa’s latest Consumer Financial Vulnerability Index reveals that households are paying off their credit agreements at the expense of these non-credit obligations. While on average consumers complied with about 75% of their credit agreements, 40% are more than two months behind on their bills.

De Clercq says debt vulnerability has fallen to its worst levels since the launch of the vulnerability index in 2009, indicating that consumers are worried about their ability to repay debt. De Clercq said declining interest rates over the past five years reduced debt servicing costs and South Africans felt comfortable about meeting these obligations.

This has, however, changed significantly over the past year and despite a further rate cut of 50 basis points, consumers are suddenly struggling to meet their debt obligations.

De Clercq said this suggests that consumers have taken on more credit than they can cope with.

“The question is, what did consumers do with the extra money (from lower interest rates)?” asked De Clercq, who argued that the increase in vulnerability is a result of excess expenditure rather than a reduction in disposable income.

De Clercq says consumers have over the years overcommitted to expenditure that they could not afford, overspending on homes, cars and other lifestyle assets.
 
As consumers were unable to generate more income and salary increases slowed due to the economic slowdown, their income was insufficient to pay for their lifestyle, resulting in income vulnerability.

Despite this slowdown in income, “consumers’ expenditure was kept afloat by credit, which complemented income sources available for expenditure”, said De Clercq.

As debt repayments increased, many households had to tap into their savings, resulting in a rise in saving vulnerability.

Only once they had exhausted both their income options and savings, did households start to default on debt repayments.


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