Rising cost of necessities, low wage growth and future rate rises causing financial stress

31 July 2017

Key findings from ME’s 12th biannual Household Financial Comfort Report

  • Households pessimistic about future financial comfort with expectations over the next 12 months down for the third consecutive Report, or down 4% over 18 months to June 2017.
  • Cost of necessities the biggest worry for 44% of Australian households, exacerbated by low wage growth and expectations for mortgage rate rises.

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Rising cost of necessities combined with weak income gains and the potential for mortgage rate rises are causing financial stress among households, according to ME’s latest Household Financial Comfort Report.

Despite ME’s overall household financial comfort index rising 2% to 5.51 out of 10 in the six months to June 2017, the Report shows a growing number of households expect their financial comfort to worsen – future expectations have fallen for the third consecutive Report, down 4% over 18 months.

ME Consulting economist and Report co-author, Jeff Oughton, said “on the surface the financial comfort of the average Australian looks good, but it’s fragile – susceptible to housing stress and energy cost shocks.

“Overall financial comfort rose most notably due to 3% rises in comfort with savings, income, and investments, reflecting some improvements in the labour market, rising house values and investments.

“But the cost of necessities remains the biggest concern for Australians and when combined with stagnating or falling income for up to nearly 70% of households, expected further rises in the cost of necessities like power prices, as well as rises in mortgage rates, the future doesn’t look as bright for some.”

The Report shows three key areas of concern for Australian households:

  1. 1.     Cost of necessities is the top worry for Australian households

According to the Report, the increasingly high cost of necessities including energy, fuel and even groceries – is a major pain point among Australians.

The Report found about half of Australians have no spare cash at the end of each month (51% typically spend all their income or more), while in the past 12 months only 32% of households reported higher incomes.

Of households whose financial situation worsened in the six months to June 2017, almost 40% claimed the cost of necessities as the primary reason.

“While retail inflation is low, in general, hikes in the cost of necessities such as fuel, household gas and electricity are the biggest worry for over 40% of households,” said Oughton.

“The Report finds households have been hit with bill shock in the first half of 2017 and are anticipating more to come. This is unsurprising given the much publicised energy price hikes from July 1.”

  1. 2.     Forecast interest rate rises causing major concerns

With mortgage interest rates up significantly over the past six months, apprehension about future interest rate rises is adding to households’ future pessimism – especially those with mortgages.

A third (31%) of households expect to be worse off financially if the RBA raises the official cash rate by 1% from its record low of 1.5%, including half (47%) of those with a mortgage, while only 7% with high comfort levels (typically high income and/or wealthy Australians) expect to be worse off.

On average, mortgaged households are paying over a third of their post-tax income on their repayments, including 15% paying more than a half and 48% paying more than 30% of their post-tax income.

“Speculation the RBA will lift the cash rate is causing households concern as it will impact monthly cash flows, ability to pay off debts, save and spend. Gen Xers (41%), single parents (36%), and to a lesser degree, couples with young children (35%), expressed the most concern about potential rate rises,” said Oughton.

“This will continue to be an important factor in household financial comfort, especially since the RBA has marked 3.5% as the new norm for the neutral cash rate – well above the current actual cash rate.”

The Report also shows owner-occupier borrowers expect to be worse off than investors, 53% vs 35% respectively, while households that expect to be better off include those that own their home outright (38%), earn over $100,000 (36%) and retirees (32%), reflecting a growing income, housing and financial comfort divide across Australian households.

  1. 3.     Income woes and underemployment exacerbating the problem

While there have been some recent improvements in the labour market, weak household income and underemployment are hurting the financial comfort of most households, particularly those earning less than $100,000.

The proportion who felt they could ‘somewhat or very easily find a new job within two months if they became unemployed’ increased from 37% to 42% coupled with a 6 point increase to 69% of households feeling secure with their job, likely contributed to a 3% rise in comfort with income in the six months to June 2017.

Yet while households with annual incomes over $200,000 recorded a ‘double digit’ rise in financial comfort (up 10% to 7.85), those earning under $40,000 per annum saw no change (static at 4.43).

“Six months ago, we saw a clear income divide emerging between the rich and poor and in this Report, this gap is exacerbated further.

“The average Australian household (those earning $75,000 - $100,000) is showing signs of subdued income growth, with 44% seeing no change in their income during the past financial year.

“Over a quarter of all households (27%) reported income cuts in the past year, rising to almost half of households earning less than $40,000 (45%), while households earning more than $100,000 were least likely to report income cuts (17%), and the most likely to have seen an income rise (46%),” said Oughton.

“Underemployment is also feeding into household concerns and many employed persons are looking for more hours of work, with 27% of casual and part-time workers eager to increase the hours they work and one in five (20%) wanting to change their status to full-time.”

Other findings – more data available on request

Mortgage and rental stress: Mortgage and rental repayments are causing a number of households financial distress. Almost 40% of households currently renting or paying off a mortgage are worried about their ability to meet mortgage repayments or rent. Indeed, currently 40% of these households are estimated to be paying over 30% of their pre-tax income to a mortgage or rent – a common point to indicate stress. In the past year, 5% of mortgage holders could not always pay their repayments, and 7% of renters could not pay their rent. Finally, there has been an increase in the number of households that do not expect to meet minimum debt repayments over the next 6-12 months, rising from 5% to 9%).  

WA continues its recovery from lows of a year ago: Financial comfort in WA increased for the second consecutive Report, rising 8% to 5.43 out of 10 in the past 12 months, following the record low results seen in June 2016 (5.02 out of 10). Most key drivers of financial comfort rose in the past 6 months – in particular, comfort with net wealth (up 9%), and to a lesser extent, comfort with debt (up 5%). 

South Australian comfort downturn: Consistent with a lack of economic activity, rising unemployment and power shortages, South Australian residents are feeling less comfortable than the majority of Australia. Financial comfort in South Australia fell to its lowest since June 2015, down 1% in the past 6 months to 5.20 – to be 6% lower than Australia as a whole. The key drivers for this decline were comfort with investments (down 13%), ability to maintain lifestyle for three months if their income was lost (down 4%) and a 9% decrease in comfort with their level of wealth. Furthermore, South Australia reported comparatively low expectations for their financial situation in the next 12 months (down 5%). 

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Editor notes

The Household Financial Comfort Report is based on a survey of 1,500 Australians conducted by DBM Consultants in June 2017. The Report is produced every six months, with the first survey conducted in October 2011.