07-Feb-2019 • Corporate

Key findings from ME Bank’s 15th bi-annual Household Financial Comfort Report:

Australia’s financial comfort gap has narrowed for the first time in seven years, with most households feeling better about their finances despite significant falls in residential property and share markets.

Income gains, easing living costs, increased cash savings and reduced overspending were key drivers in households’ rising financial comfort, but belt tightening could be a bellwether for slowing economic growth.

Falling house prices help reduce some big gaps in comfort

In the seven years ME has conducted the bi-annual survey, the financial comfort between property owners has diverged from renters. This is the first survey we have seen the comfort between these cohorts closing.

Consulting Economist for ME, Jeff Oughton, said “The comfort gap between property owners and renters, as well as between very high income earners and other income brackets, has narrowed.

“We’ve seen a correction for wealthier, older property-owning Australians who’ve been riding the hot property and bull share markets for much of the past seven years, while middle and lower-income households have begun to benefit from an easing in living cost pressures and income gains.

“Together the changes have helped to narrow the big gap in financial comfort that had been widening.”

“Cooling housing and share markets haven’t yet dented the financial outlook of most Australian households, and many residential property owners remain positive: only 13% of home owners and 11% of investors expect the value of their properties to fall in 2019.”

The financial comfort of renters, while still significantly lower than other tenures, was up 8% to 4.78 out of 10, its highest in four years, reflecting improving rent conditions, while the overall financial comfort of households who own a home mortgage-free fell 3% to 6.27 out of 10, its lowest point since the survey began.

The gap in financial comfort between high and average and lower income households also closed, with the overall financial comfort of those earning over $200,000 pa falling sharply by 6% to 6.79, while those earning $75,000-$100,000 pa reported their overall financial comfort had increased by 7% to 5.87 and to a lesser extent those under $40,000 pa (up 2% to 4.52).

Overall financial comfort up despite asset price falls

In the six months to December 2018, the Report’s overall Household Financial Comfort Index increased by 2% to 5.56 out of 10 – higher than the past five surveys and above the historical average of 5.45 out of 10 since the survey began in October 2011.

A key factor driving the rise was income gains with a continued strengthening in labour market conditions increasingly flowing through to bigger pay packets. The proportion of households reporting income increases in the six months to December 2018 rose 4 points to 38%, its highest level in three years. ‘Changes to my income’ was also the most common reason cited for improvements to one’s financial situation.

Another contributing factor to the overall increase in household financial comfort was an improvement in how households felt about their ‘ability to pay regular expenses’, which increased 3% to 6.60 out of 10 – albeit the cost of necessities remains the ‘biggest worry’ about their household finances.

Cautious Australians ‘tightening their belts’

ME’s Report also shows more households saving, less overspending, and comfort with short-term cash savings is on the rise.

The number of households saving each month increased 3 points to 51% in the past six months – its equal highest level since the survey began, with the estimated average amount savers are putting away increasing 7% to $862 per month. Meanwhile, the estimated average amount over-spenders drew-down on savings or credit each month decreased 28% to $453 per month.

Oughton said increased belt-tightening may be a consequence of sustained property falls as well as economic and political uncertainty.

“We’re still seeing some geopolitical effects, with households concerned about the world economy up two points to 29%, and combined with domestic property and share market corrections, many Australians are beginning to tighten their belts to build financial resiliency,” Oughton said.

“If above average cash savings and reduced spending behaviour continues during 2019 it could significantly slow economic growth and in turn may lead to smaller job and income gains.”

Increased savings has flowed through to greater financial resilience with an improvement in households’ ability to handle a financial emergency (up 1% to 4.83, the second highest level since the report began). Almost half of households with a mortgage (49%) continue to pay above the minimum in repayments.

Housing and credit stress decline

In terms of housing payment stress, less than half (47%) of households at end 2018 are contributing more than 30% of their income towards housing each month – a common indicator of financial stress – a 9 point fall from 56% six months ago, driven by a very large improvement amongst renters (from 67% to 51% in the past six months), while stable at 44% for households with home loans.

The Report also found a decline in households being unable to meet debt servicing commitments in the last year, with just 12% unable to meet a personal loan or credit card repayment. Furthermore, only 7% missed a mortgage payment due to lack of funds in this time.

With CoreLogic data showing residential property prices falling up to 20% in some suburbs and overall values down 9% in Sydney and 7% in Melbourne, but unchanged across regional Australia during 2018, ME’s Report found it was having no notable negative impact on households’ comfort in those major capital cities and states, up about 3% in Melbourne and more in Victoria and down only 1% in Sydney and NSW.

Across regional Australia as a whole, household comfort rose by 6% to 5.43 out of 10 – its highest level in four years, reducing the gap in financial comfort between regional and metropolitan households with only a 1% rise among metropolitan-based households.

Financial comfort in Queensland also jumped markedly to a record level of financial comfort in December 2018 – up 8% to 5.68 and surprisingly, the highest across Australia, due to broad-based improvements across all drivers of comfort.

– ends –

Editor notes: The Household Financial Comfort Report is based on a survey of 1,500 Australian households conducted by DBM Consultants in December 2018. The report is produced every six months; the first survey was conducted in October 2011.

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