Household financial comfort slides across regional Australia

Household financial comfort fell markedly across regional Australia during the six months to December 2019, according to ME Bank’s latest Household Financial Comfort Report.

While ME Bank’s latest biannual survey showed the financial comfort of metropolitan households increased 3% to 5.76 out of 10 to near record highs – especially in eastern Australia – financial comfort for regional households fell 4% to 5.08, continuing a decline over the past year to approach its lowest point in the past eight years.

ME’s Consulting Economist, Jeff Oughton, said the gap in financial comfort between regional and metropolitan households had now reached a record 13%, almost twice the historical average of 7%.

“The sharp fall in financial comfort in regional areas is likely a result of ongoing drought and recent bushfire catastrophes, which have significantly lowered already low levels of financial comfort. ‘Comfort with cash savings’ fell 9% and the ‘ability to deal with financial emergencies’ fell 7%, while long-term retirement comfort deteriorated, with ‘anticipated standard of living in retirement’ down 7%. Regional Queensland reported the largest fall in comfort, down 14% to 4.95, dipping below regional New South Wales (5.09) and Victoria (5.20).

“In contrast, the improvement in the financial comfort of metropolitan households reflected significant gains in all key drivers, with record high levels of comfort approached in Sydney (up 1% to 5.94), Melbourne (up 3% to 5.91) and Brisbane (up 10% to 5.82).”

Overall national household financial comfort up only slightly

The notable falls in financial comfort across regional Australia dampened an overall rise in national financial comfort, with ME Bank’s overall Household Financial Comfort Index improving by 2% to 5.59 out of 10 during the six months to December 2019. Across the 11 key drivers that make up the Index, 10 of the drivers improved – with notable improvements in household ‘comfort with debt’ and recent ‘changes to their financial situation’.

Record low mortgage rates and rising house prices improving comfort with debt in the major cities

Across the 11 key drivers that make up ME’s Household Financial Comfort Index, the biggest improvement was with ‘comfort with debt’, up 5% to 6.55 out of 10, reaching record highs.

‘Comfort with debt’ increased 7% for households in metropolitan areas, particularly those with mortgages on their homes or on an investment property.

“Significantly lower home loan rates and relatively low and stable unemployment rates helped to significantly improve ‘comfort with debt’ – especially in major capital cities, while a partial reversal of the fall in residential property prices in eastern capital cities and expectations of further price gains have also eased gearing concerns,” said Oughton.

Mortgage stress eases further and expected debt management improves

Consistent with a significant fall in home loan rates, sustained low unemployment and improved property prices in most of Australia, mortgage stress eased a bit further during the past six months. Nevertheless, there remains generally high levels of mortgage stress and significant other financial stress amongst households. The proportion of households contributing more than 30% of their disposable household income towards their mortgage fell a further 2 points to a still high 41% of households, 5 points lower than a couple of years ago.

Recent improvements to households’ financial situation

Another driver of overall comfort that improved significantly was comfort with ‘recent changes to households’ financial situation’ – up 4% to 5.25 out of 10 – its highest level in four years – due to a large rise of 5% to 5.41 in metropolitan regions, but not regional areas (unchanged at an index of 4.76).

Over a third (36%) of households indicated their ‘financial situation had improved over the past year’ with the main reasons being less concern about living cost pressures, fewer households reporting falls in income, more households reporting improvement in employment status and improvements in cash savings.

‘Comfort with the ability to manage a financial emergency’ only saw a slight improvement (up 1% to 4.82), but was significantly lower than average among single parents (3.17 out of 10). It also remains the lowest of all drivers across the Household Financial Comfort Index – especially for regional areas.

Record low Reserve Bank official interest rates helping, but divide households

For the first time in the latest survey, ME asked households if they thought they were ‘better’ or ‘worse off’ as a result of the historically low official interest rates. Overall, slightly more households reported being better off (27%), compared to worse off (23%), while the remaining half of households reported they weren’t impacted positively or negatively. Put another way, a net positive impact from very easy monetary policy.

“Those households paying off a mortgage felt they were far better off than those renting or who already own their homes. When it came to investors with debt, results show they feel they’ve benefitted the most (60% ‘better off’) from the flow on to record low mortgage rates – an indication of the high level of gearing among residential property investors in Australia.”

In terms of life stage, young singles and couples with no children appeared to be the biggest winners, with over half (51%) saying they were ‘better off’, followed by couples with young children (41%).

Property price optimism revised higher

The Report revealed household optimism regarding the outlook for residential property prices has continued, with both owner occupiers (47%) and investors (51%) revising up price expectations for 2020.

Brisbane investors and owner occupiers were the most optimistic about higher property prices (67% and 61%, respectively), followed by Melbourne owner occupiers (55%) and Sydney investors (51%). Owner occupiers in Perth (29%) remain the least optimistic in this regard.

Key winners and losers from ME’s 17th Household Financial Comfort Report:

Winners:

• Households in capital cities - Brisbane saw a substantial 10% increase in financial comfort to 5.82, Melbourne improved 3% to 5.91 and Sydney residents up a bit higher to 5.94 – nearing record levels.
• Households paying off a home mortgage – up 4% to 5.46. Of those households that found themselves better off following the RBA interest rate cuts, 32% increased their mortgage repayments.
• Households with higher annual incomes – especially greater than $100k – continue to experience significantly more income gains than households with lower annual incomes – especially less than $40k (for the seventh consecutive report).

Losers:

• Households in regional areas - especially regional Queensland, where comfort fell significantly by 14% to 4.95.
• Casual workers – comfort fell 4% to 4.80, continuing the trend of these workers having the lowest level of comfort across workforce segments.
• Single parents – continued to record the lowest financial comfort of any household type (up 2% to 4.45), especially those dependant on government assistance (down 6% to 2.99).
• Renters continued to report low comfort at 4.67 and high rental payment stress – up 3 percentage points to 65% of all renters.

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Editor notes: The ME Household Financial Comfort Report provides in-depth and critical insights into the financial situation of Australians based on a survey of 1,500 households. The survey is designed, developed and produced biannually by industry superfund-owned bank ME with assistance from DBM Consultants and Economics & Beyond. This edition presents the findings from the 17th survey, published in February 2020. The Survey was conducted in early December 2019 while bushfires generally intensified across Australia during December and early January 2020. Bushfire state of emergencies/catastrophic alerts were progressively announced for parts of QLD in November, SA in late November and again late December, NSW also in November and again in mid and late December, VIC in late December and WA in November and again in December. This means the timing of the Survey did not capture the full impact of these disastrous fires on the financial comfort of some regions.