Confusion about "joking."

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I just had a bizarre encounter.
For some time I have had relative who seems to me to be progressively displaying behaviour that is borderline psychotic. It's vitriol. Wild, paranoid ideas about how everyone hates them, people are actually conspiring to get them and take their house / land, everyone discriminates against them because of age and gender, people are horrible to them in the street, relatives actually wish them dead, everything that happens in the wider world is about them (it's all focused on them - every noise is made to annoy them, cars go by on the road just to intimidate and harass them, etc).
This person keeps saying things like this, all the time, along with saying things like "I'd be better off dead" because something trivial like a leak above the door started up in the rain. They also constantly invent negative things for no reason - like if I suggest we go out for lunch, they'll start saying things like "well, everything will probably be shut. And even if we get a table there will be horrible people there and they'll make too much noise."
Because of this behaviour, I have been slowly cutting contact with this person. Every encounter ends up an argument - them displaying this behaviour, and me arguing for the positive side of everything and trying to counteract this extreme hostility. It's exhausting and I don't need that in my life. I have tried to moderate this for years now and there has been only deterioration, so I've finally had enough.
Then today, when I snapped at them a bit, they said they are always "only joking" when they say these things.
I considered this. I have a great deal of difficulty understanding humour and double-talk in real time. I can get jokes if it's obvious, but this subtle double-talk where people do not say what they mean, only insinuate, and don't make it obvious chronically goes unnoticed by me. I interpret them at the literal meaning of their words.
It's just possible this horrible behaviour has been meant in a joking way this whole time, and I have been interpreting a "joking" attitude as a literal interpretation of the words - that they literally believe all their relatives want them dead, or that cars literally park on the road as a direct attempt to intimidate them and steal their house (which, if it were literal, translates into batshit crazy in my view).
But then something else occurred to me - it's all very well to hide behind "but it was just a joke" when it becomes clear someone is calling you out on your shite. It's especially easy to do this to an autistic, because it's got to be obvious that I will question myself and my social inabilities and consider this being at fault more than anyone neurotypical.
So now I don't know what to think. One one side it's possible this has been all a (albeit bad) joke and I have misinterpreted. It's equally possible that they perceived the fact that I have had enough of their garbage, and proverbially backpedaled and tried to pass it off as a "joke" to placate me and disguise their behaviour.
Because I really cannot come up with any way this could have been funny.
If anyone has actually had the attention span to read all that - what would you think? What would you do? Have you encountered a similar situation? Wtf? Insights?

A lot to unpack here. Are there other relatives in your family who interact with this relative? Can you confide and consult with other kin on how to deal with this person?

Is this person elderly? Sounds like they could actually be getting dementia (which isn't necessarily old age related, they could be just going nuts). That paranoid bit could be actual clinical paranoia setting in.

Worked with a toxic guy who "joked" all of the time. Not much one could do about him.

I think he said that to placate you.

My brother does a similar thing, where he'll sound off at you about something, push it as far as he can, then when you snap back, he's "only joking!!". I think it's passive aggressive.

Also, this may not be the case here, but in general, I've found that a lot of people can pretty quickly work out that you never "get it", and will use this to their advantage. Whether it's to fool you into something, or just to ridicule you, they'll push it as far as they can, simply because we appear to be gullible.
When you work it out, and question them, they're always "only joking", again, to make YOU feel bad for snapping back. Passive aggressive people are so hard to read.

It sounds as if your problem person is aware that they are exaggerating wildly, but you have trouble over literal interpretations, and nobody else is even interested.
My ex had, at some point, exaggerated something, and liked the effect. Then her friends learned to discount what she said a bit, so she exaggerated more, and so on. It got bad. Every ego wants to be supreme, but everyone over two is supposed to know about sharing.

I think this could be either. My Dad says a lot of terrible stuff because he enjoys it, I used to debate back but that escalated things which he enjoyed but I didn't. Now when he's in that mood I agree with him. He says how badly someone else is driving, I say other people shouldn't be alowd to drive as all the roads are for him only. It takes all the heat out of his argument because he knows the roads don't belong to him.

I think the best approach with your relative would be to laugh every time she says something like that. If she says it's a joke, treat it as such, if she gets annoyed you'll know the joke thing wasn't true.

Either way your relative sounds like they're hard work to be around.

It could be partly explained as having a dry sense of humour or a pessimistic sense of humour. Not knowing them it is hard to know exactly.