THE latest financial results from banking group Absa Group [JSE:ASA]
tell a fascinating story about the health of the South African consumer.
The homeloan division lost R992m in the financial year and increased its bad debt provisioning from R2.2bn to R4.5bn. In contrast, the card division, including the Edcon credit card book, delivered a profit of just over R2bn.
While the homeloan business grew just 2% in revenue, the card division rose 15%. If you consider that Absa reduced its employee headcount from 35 200 in 2011 to 33 717 in 2012, you will begin to understand why the middle class is one step away from disaster.
Absa’s own property outlook for 2013 contains some interesting stats. In South Africa, the ratio of gross household saving to disposable income over most of 2012 was 1.7%. In other words, for every R100 in disposable (after-tax) income earned by households, they saved only R1.70.
At the same time the ratio of outstanding household debt to annual disposable income was 76%. In other words, we’re heavily indebted and not saving.
Nothing new there, but the ratio of households’ net wealth to disposable income increased to 307.9% in third quarter 2012 as a result of the combined performance of the financial and property markets.
Absa defines this metric as the total value of non-financial assets (mainly residential buildings) and financial assets (mainly assets with monetary institutions, interest in pension funds and long-term insurers, equities and bonds) and fewer liabilities (mortgage loans and other debt).
By this definition we build up real “wealth” in our house.
There’s an opportunity here to break out of this negative trend and the solution is simple – pay down your homeloan, buying your own financial future.
If you have a R900 000 bond and you put an additional 10% a month into the bond repayment you knock 53 months off of your repayment period.
Even if you assume zero capital growth on your property, you have to remember interest rates will rise in the next few years and paying down cheap debt now will make it significantly easier as the interest rate cycle rises.
Apart from four-and-a-half years of not having that pesky debit order going off your account each month, 53 months and roughly R8 400 of additional money to allocate to savings each month goes a long way to building up a little nest egg.
If the stock market is not for you and you are happy to simply build up savings in an efficient retirement annuity, then this may well be one of the better ways to buck the trend and build wealth in the long run.
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