Household Financial Comfort Report

Latest report on household financial comfort.

Key findings from ME’s 10th biannual Household Financial Comfort Report include:

• Double the struggle to repay debt: Of the 65% of households with outstanding debt, 10% expect they won’t be able to meet minimum debt repayments in the next six to 12 months – a twofold increase since December 2015 and the highest since the survey began in late 2011.

• ME’s overall Household Financial Comfort Index dropped significantly by 4% to 5.37 out of 10 in the six months to June 2016. This deterioration reverses the rise of the previous survey and takes overall comfort to slightly below the Index’s historical average.

• Baby boomers rated themselves as the hardest hit: Perceived comfort with ‘income’, ‘cash savings’ and ‘net wealth’ deteriorated considerably, causing baby boomers’ comfort to fall the most of any generation (down 7%) to the lowest level for the past couple of years (5.42 out of 10).

ME’s 10th biannual Household Financial Comfort Report shows marked deterioration in Australian households’ confidence in their ‘ability to manage debt over the next six to 12 months’, doubling from about 5% over the past few years to 10% in the past six months to June 2016 (see Report page 37).

Single parents reported the highest levels of concern in their ‘ability to meet minimum debt repayments over the next six to 12 months’ (19%), followed by ‘couples with young children’ (15%) and ‘young singles/couples’ (12%).

Consistent with an expected rise in debt stress, more households ‘paying off or owning a home’ reported to be drawing on their home equity to ‘pay off debt’ (up 4 points to 11%) and ‘to make ends meet’ (also up 4 points to 10%) during the first half of 2016 (see Report page 38).

Jeff Oughton, ME’s consulting economist and report co-author, said that there is a marked increase in households feeling vulnerable to income shocks associated with wage cuts, fewer hours worked and a lack of suitable jobs as well as lower dwelling prices in some parts of Australia, all of which increases debt stress.

“With a lack of cash savings or equity buffer in their home, there’s a marked increase in households expecting to be unable to service their debts, despite record low borrowing costs,” he said.

As for the overall finding, ME’s overall Household Financial Comfort Index – a measure of households’ perceptions of their financial comfort − dropped significantly by 4% to 5.37 out of 10 in the six months to June 2016.

This result means about 90% of Australian households reported low-to-mid financial comfort, with only 10% reporting high comfort. The result reverses the increase in comfort reported in December 2015, and is the fourth lowest financial comfort level since ME commenced the survey in late 2011 (see Report page 5).

All 11 index components deteriorated, with the largest falls seen in ‘net wealth’, ‘income’, ‘cash savings’ and ‘investments’ as well as households’ ‘ability to handle short-term income loss’ and ‘anticipated standard of living in retirement’.

Oughton said the Report identified a number of factors contributing to the significant deterioration in perceived financial comfort.

“The findings clearly indicate heightened concerns around the adequacy of income, the cost of necessities, lack of job availability and security as well as deterioration in expectations about meeting minimum debt payments and maintaining a standard of living in retirement,” he said.

In terms of generations, the comfort of baby boomers fell the most of any generation (down 7%) to the lowest level reported for that age cohort in the past couple of years (5.42 out of 10) – lower than Gen Y (down only 2% to 5.46), but still above Gen X (steady at 5.18) (see Report pages 9-10).

Baby boomers reported greater perceived stress with ‘income’, ‘cash savings’ and ‘net wealth’ in the past six months to June 2016, despite continued gains in actual income and net wealth across households on average.

Baby boomers also reported greater worries with the ‘cost of necessities’ and the ‘ability to maintain lifestyle in retirement’ as well as the ‘level of government assistance available’ and ‘impact of legislative change on their financial situation’.

“The findings add to a number of recent policy debates such as changes to superannuation,” said Oughton.

“As many as 45% of baby boomers said they expect to be worse off after the recent Federal Budget. Furthermore, retirees reported the lowest levels of comfort since the survey began, although they’re still the most financially comfortable of any household life stage.”

Other findings

Work segment disparity: Full-time self-employed workers were the only work segment to experience a rise in financial comfort (up 4% to 5.96 out of 10) in the past six months to June 2016, and reported the highest comfort across the labour force. In contrast, there were major drops reported by casual and part-time self-employed workers whose comfort fell 14% and 16% to record lows of 4.44 and 5.13 respectively. These workers reported double-digit falls in drivers such as ‘income’, ‘cash savings’ and the ‘ability to cope with a financial emergency (loss of income)’ (see Report page 14). Consistent with falls in comfort with these key drivers were increased concerns around ‘job availability’, ‘job security’, and ‘adequacy of income’ (see Report pages 18-25).

Standout states and cities: South Australia was the most financially comfortable mainland state in Australia, rising 2% to a historical high of 5.74 out of 10, while all other mainland states experienced a fall. Comfort levels in Western Australia fell 2% to a record low of 5.02 out of 10. While financial comfort in Victoria as a whole experienced a 6% drop to 5.52, Melbourne remains not only the world’s most liveable city*, but also Australia’s most financially comfortable city – reporting a comfort level of 5.80 out of 10 – down only 2%, and still well ahead of Sydney, which reported a 4% drop to 5.58 out of 10 (see Report page 12-13).

Concerns with the Federal Budget: Overall, more households reported they would be ‘worse off’ (35%) than ‘better off’ (14%) when asked about the ‘expected impact of the 2016/17 Federal Budget on their overall financial situation over the next year’. The remaining 50% of households said their financial situation would remain ‘about the same’. Compared to previous surveys, these findings are more negative than those for the 2015/16 Budget, but a lot better than the 2014/15 Budget (see Report page 16).

Editor notes

*The Economist’s liveability ranking, 2015: http://www.theage.com.au/victoria/melbourne-named-worlds-most-liveable-city-for-fifth-year-running-20150818-gj1he8.html

The Household Financial Comfort Report is based on a survey of 1,500 Australians conducted by DBM Consultants in June 2016. The Report is produced every six months, with the first survey conducted in October 2011.