South African households experienced a devastating year in 2018. Collectively they lost about R450 billion or half-a-trillion rand of their real net wealth (the actual purchasing power of net wealth).
This equates to an average loss of about R32 000 per household, which means that the net wealth per household was at the same level as in 2008.
This has grave consequences – for households, the government, companies and the performance of the South African economy. But before we turn to consequences, it is necessary to understand what household net wealth is.
Consciously, or subconsciously, households’ ultimate financial end goal is to work towards increasing each family’s net wealth – as this affects their standard of living during working years, financial resilience and their ability to retire at an acceptable standard of living, thus enabling them to live as best as they can over their lifetime.
To clarify further, there is a big difference between income and net wealth. One way to understand household net wealth is to know that it is not income (for example, salaries and wages, investment income, pension, etc). And an increase in income does not necessarily translate into higher net wealth. However, most households use their income to increase, or accumulate wealth. However, how you use your income will impact on your net wealth.
Simply put, a household’s net wealth is defined as the total value of assets minus the total value of liabilities. Assets are a household’s belongings, both material and financial. Material assets include residential property, motor vehicles and household contents such as furniture, clothing, appliances, etc. Financial assets are the value of savings in instruments such as pension funds, retirement annuities, unit trusts, insurance policies, cash in the bank and direct holdings of financial instruments such as shares in companies.
Liabilities are made up of the outstanding value of all debts and unpaid accounts. Examples are what a household still owes on a home loan, vehicle loan, personal loan, credit card, overdraft facility, loan from a retailer or micro lender and accounts such as municipal bills.
Subtracting the outstanding value of what is owed (liabilities) from the total value of assets provides an indication of the value of household net wealth. This calculation takes some effort, but it is an exercise every household should do at least once a year. If you are uncertain of how to do it, a financial adviser can help with the calculation.
So, what happened last year? The main reason for the decline in the value of South African households’ net wealth is due to the decline in the real value of their financial assets (which comprise about 65% of total household assets). More specifically, the decline in the value of household savings in retirement funds and in instruments such as unit trusts was caused by declining share prices. A lot of the savings of households are among others invested in companies listed on the JSE stock exchange.
Changes in the share prices of companies thus affect households’ net wealth – and it is for this reason that South Africans should take note of what is happening to, for instance, the share price of Steinhoff or Naspers. Moreover, as Naspers owns shares in Tencent Holdings, a company in China, anything that affects Tencent’s share price will affect Naspers’ share price, which in turn will affect South African households’ financial asset values and therefore their net wealth.
Last year, the trade war between the US and China caused the share price of Tencent to decline, which led to a decline in Naspers’ share price and thus in the net wealth of households. This illustrates just how sensitive South African households’ net wealth is to events in the rest of the world.
Some good news, though, is that with the trade war almost over, share prices and thus household net wealth have started to recover.
But domestic events also contributed to declining share prices. These include (but are not limited to) load shedding by Eskom and uncertainties caused by “untested proposed policies” such as land expropriation without compensation, nationalising the SA Reserve Bank, etc. Whereas load shedding negatively affected South African companies’ ability to produce, make profits (and pay taxes) and employ workers, the policy uncertainties contributed to investors getting rid of the shares of South African companies.
Household net wealth was also negatively affected by the declining real value of residential properties and an increase in debt and unpaid accounts.
A last point, a strong bidirectional relationship exists between household net wealth, economic growth and job creation, as growing net wealth contributes to stronger economic growth and job creation. For household net wealth to increase sustainably, we need an economy that is growing and more resilient to international events.
