In just 12 months, interest rates went up by 3.5 percentage points, but this does not mean your bond repayments did too; no, that increase actually means you are now paying 27.2 percent more on your home loan.
Added to this, the average salary increase from 2022 to 2023 did not keep up with inflation during that same period.
Homeowners with a R1m bond paying R8,521 a month last year were paying R10,837 this year, an increase of R2,316, while those servicing home loan debt on a R2m property were paying an extra R4,633 a month.
Statistics from May 2022 to May 2023 reveal that salaries went up by 5.4 percent on average, but annual headline inflation climbed by 6.3 percent. On top of this, interest rates – which are not calculated as part of inflation, increased by 3.5 percent this period.
Built in to the rise in inflation were these increases:
* Food: 11.8 percent
* Fuel: 3.5 percent
* Housing and utilities: 4 percent
* Health: 5.8 percent
* Education: 5.7 percent
These figures paint a picture of why South Africans are currently in a cost of living crisis. But they do not paint an image of the real impact it is having as they are just increases applied to the average person. And as FNB senior economist John Loos says: “The average person doesn’t exist.”
Everyone more than likely needs to cut back on spending somewhere, but for one person that could mean downgrading a luxury holiday to a more affordable one, while, for another, it could mean taking certain foods out of their children’s mouths.
Because salaries have not kept up with inflation and interest rates, people have had to cut down on non-essentials and postponable expenditures which may be essential but can be put off until further down the line, Loos explains.
“Non-essentials could be a type of food. People need to eat but perhaps they don’t need to eat the more expensive pre-packed foods on the shelves, but rather just the basics. Maybe they need to stop buying cheese, or opt for a less expensive cheese, for example.”
During times like these, he says people typically reduce their vacations. They don’t need to go on holiday or, if they do, they take cheaper holidays. They cut down on leisure travel so may still go away for the weekend but perhaps opt for somewhere closer to save on fuel.
Life insurance is another expenditure that many people either cut back on or cancel.
Other examples of postponable essentials are home or vehicle maintenance. It may not be wise from a safety point of view but car services can be postponed.
“Certain people are already down to the essentials and don’t even have these expenses to reduce, so they have to cut back on basic food stuff. The lower one’s income, the less there is to cut back on. Higher income people can cut back on more things,” Loos says.
James Hodge, chief economist for the Competition Commission of South Africa (CCSA), recently stated that food inflation has not just been at record high levels in recent years, but has hit the poorest consumers the hardest.
Since Covid began, there has been an increase of about 34 percent in the price of foods with some like vegetables, oils, fats, breads, and dairy seeing much higher levels of inflation.
“For the poorest 10 percent of households, food makes up 40 percent of expenditure compared to 5 percent for the top 10 percent of households. Inflation has had a completely lopsided effect, affecting the poorest consumers most.”
With the rising fuel prices, Loos adds that some consumers are fortunate that their companies are flexible and allow them to work remotely to cut back on transport costs. But for someone who works in retail or hospitality, for example, they do not have that option.
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