Household Financial Security Takes Another Hit In November

Digital Finance Analytics has released the November 2017 results from our Household Financial Security Index. The index uses data from our household surveys to assess households level of financial comfort.

The index fell to 96.1, which is below the 100 neutral metric, down from 96.9 in October 2017. This is the sixth month in succession the index has been below the neutral point.

Watch the video or read the transcript.

Owner Occupied households are the most positive, scoring 102, whilst those with investment property are at 94.3, as they react to higher mortgage repayments (rate rises and switching from interest only mortgages), while rental yields fall, and capital growth is stalling, especially in Sydney).  Households who are not holding property – our Property Inactive segment – will be renting or living with friends or family, and they scored 81.2. So those with property are still more positive overall.

Looking across the states, households in NSW and VIC are just above the neutral setting, but continue to slipping lower. Households in QLD are below the 100, but up a little, as are those in SA and WA. Western Australian households are the least positive, but somewhat improved.

Looking across the age ranges, younger households are the least positive, and all ages banks fell, other than those over 60 years which saw a small rise.

Looking at the FCI score card, job security is on the improve, reflecting rising employment participation, and the lower unemployment rate.  Around 20% of households feel less secure, especially those with multiple part time jobs.

Savings are being depleted to fill the gap between income and expenditure – as we see in the falling savings ratio. As a result, nearly 40% of households are less comfortable with the amount they are saving. This is reinforced by the lower returns on deposit accounts as banks seek to protect margins.

More households are uncomfortable with the amount of debt they hold with 40% of households concerned. The pressure of higher interest rates on loans, tighter lending conditions, and low income growth all adds to the discomfort. More households reported their real incomes had fallen in the part year, with 50% seeing a fall, while 40% see no change.  Only those on very high incomes reported real income growth.

More households reported a rise in their costs of living, and this month this included higher school fees and child care costs, energy bills and fuel costs. The average cpi of around 2% appears to understate the real life experience of many households.

Finally, household net worth improved for more than 60% of households, but there is a rise in those seeing no growth, mainly as home price growth eases back. Those with share market investments have done quite well in recent months.

Looking ahead, we expect the overall index to trend lower, as incomes remain constrained, and costs of living grow. The property market has a big impact on households level of confidence and the leading indicators are flagging lower outcomes ahead.  However, home prices would need to fall significantly to allow many of those currently unable to afford to buy in to the market.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

 

Household Financial Security Weakens Again In October

The latest edition of the Digital Finance Analytics Household Financial Security Confidence Index to end October shows households are feeling less secure about their finances than in September. The overall index fell from 97.5 to 96.9, and remains below the 100 neutral setting. We use data from our household surveys to calculate the index.

While households holding property for owner occupation remain on average above the neutral setting, property investors continue to slip further into negative territory, as higher mortgage rates bite, rental returns slide and capital growth in some of the major markets stalls.  Those property inactive households remain the most insecure however, so owning property in still a net positive in terms of financial security.

There are significant variations across the states. VIC households continue to lead the way in terms of financial confidence, and WA households are moving up from a low base score. However, households in NSW see their confidence eroded as prices slide in some post codes (the average small fall as reported does not represent the true variation on on the ground – some western Sydney suburbs have fallen 5-10% in the past few months). Households in QLD and SA on average have held their position this month.

Confidence  continues to vary by age bands, although the average scores have drifted lower again. Younger households are consistently less confident, compared with older households, who tend to have smaller mortgages relative to income, and more equity in property and greater access to savings.

Looking in more detail at the FCI scorecard, 63% of household saw no change in their job prospects last month, while 19% felt less secure, especially in WA and SA.  Those with savings were a little less comfortable, reflecting both a net reduction in the amount saved (more households are raiding their savings to cover their costs of living) and lower interest rates on deposits.  Those with shares and other investments benefited from higher stock prices.

The burden of debt weighed heavy on many households with 42% of households less comfortable with their debt, a rise of 1.4% in the month. Some were concerned about potential interest rate rises, while others, especially those on interest only loans, were exercised by the prospect of having to refinance down the track.

More than half of households say their real incomes have fallen in the past year, and 67% said their costs of living have risen, up 4.1% from last month. Utility bills are higher, as are child care costs and school fees. We see more household relying on multiple part-time jobs to bring in sufficient income to pay the bills, and even then many are having to tap into savings to keep afloat.

We see little evidence of income growth in real terms, while credit growth continues at more than three time income. Given the recent slide in property values, and continued rises in living costs, we do not expect the index to move back into positive territory in the next few months.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

 

 

The Growing Gap Between Employment And Financial Security

The September update of the Digital Finance Analytics Household Finance Security Index, released today, underscores the growing gap between employment, which remains relatively strong, and the Financial Security of households.  We discussed this recently on ABC The Business. The Index fell from 98.6 in August to 97.5 in September.

This is below the 100 neutral setting, and continues the decline since December 2016.  Watch the video, or read the transcript.

The state by state view highlights a fall in NSW, while VIC holds higher, and there was a rise in WA from February 2017 lows. This highlights the fact the households across the national are under different levels of pressure.

Tracking by age bands we find younger households are significantly less confident, compared with those aged 50-60 years.  But across the board, the general trend is lower.

Property ownership remains a large factor, with those renting still below those owning property. We also see an ongoing decline in property investor confidence, thanks to tighter underwriting standards, higher mortgage rates, and the reduction in interest only loans availability.

Looking at the scorecard, there was a 4% fall in households comfortable with their savings, as they are forced to raid them to cover ongoing expenses (and the low returns on deposit balances as the banks seek to build margin).  There was a rise of nearly 3% of households who were uncomfortable with the amount of debt they hold, reflecting higher mortgage rates, especially on investment loans and interest only loans, and concerns about future rate movements. Finally, more households reported their overall net worth has deteriorated as home prices came under pressure.

The disconnect is that while people can, in the main, get some work, their earned income is not rising as fast as costs. We also find more households relying of a larger mix of fragmented part-time jobs, which tend to be less predictable.  As a result, we expect the current trends to continue, as momentum in the housing sector ebbs.  There is no obvious circuit breaker available in the current low interest rate, low growth environment.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

Household Finance Confidence Weakens Again

Digital Finance Analytics has released the August 2017 edition of our Household Finance Confidence index, which uses data from our 52,000 household surveys and Core Market Model to examine trends over time. Overall, households scored 98.6, compared with 99.3 last month, and this continues the drift below the neutral measure of 100.  This is an average score, and there are significant variations within our various segments.

Watch the video to learn more, or read the transcript below:

Younger households are overall less confident about their financial status, whilst those in the 50-60 years age bands are most confident. This is directly linked to the financial assets held, including property and other investments, and relative incomes. Households over 60 years track quite closely to the national averages.

For the first time in more than a year, households in Victoria are more confident than those in NSW, while there was little relative change across the other states. One of the main reasons for the change in NSW can be traced directly to the state of the Investment Property sector, where we see a significant fall in the number of households intending to purchase in NSW, and more intending to sell. One significant observation is the rising number of investors selling in Sydney to lock in capital growth, and seeking to buy in regional areas or interstate. Adelaide is a particular area of interest.

Consistent with our earlier analysis, a household’s property owing status has a significant impact on their relative financial confidence, with owner occupied households the most confident, ahead of  property investors and those renting. That said, low rental growth rates mean more investors are underwater on a cash flow basis, especially in Victoria, where more than half are not covering the borrowing costs of their investment mortgage from rental receipts (but are still hopeful of capital gains, and they can offset the losses thanks to tax breaks). Actually returns are much stronger in QLD and TAS.

Looking at the scorecard, job security remained about the same this month, but there was a 1.7% fall in those more comfortable with their savings and a rise of 2.5% of those less comfortable – thanks to lower interest rates on deposits as banks seek to build margin.  The debt burden remained a concern, with a small rise in those worried about meeting repayments on outstanding loans.  Incomes are still under pressure, with more saying their incomes in real terms have been devalued, down 1%, to 52% of households.  Costs of living continue to rise for 63% of households, and only 7% saw a fall. 65% of households said their overall  net worth rose again, thanks mainly, to home prices rising. Some in WA, QLD and WA reported a fall, directly due to house values continuing to slip.

Given the fact that the dynamics of the economy seem to be locked in place with lower income growth, rising costs of living, and the property market adjusting to the new regulatory environment, we expect confidence to continue to drift lower in the months ahead. There is no obvious circuit breaker available in the current low interest rate, low growth environment. The leading indicators suggest that the recent positive momentum in the property market may be short lived.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

Household Finance Confidence Continues To Fall

Digital Finance Analytics has released the July results from our Household Finance Confidence Index, which shows a further fall, with momentum decaying.

The average score was 99.3, down from 99.8 last month and below the neutral setting. However, the average score masks significant differences across the dimensions of the survey results. For example, younger households are considerably more negative, compared with older groups.

This is strongly linked with property owning status, with those renting well below the neutral setting (and more younger households rent these days), whilst owner occupied home owners are significantly more positive. We also see a fall in the confidence of property investors, relative to owner occupied owners.

Across the states,  we see a small decline in confidence in NSW from a strong starting point, whilst VIC households were more confident in July.

The driver scorecard shows little change in job security expectations, but lower interest rates on deposits continue to hit savings. Households are more concerned about the level of debt held, as interest rate rises bite home. The impact of flat or falling incomes registers strongly, with more households saying, in real terms they are worse off. Costs of living are rising fast, with the changes in energy prices, child care costs and council rates all hitting hard. That said, the continued rises in home prices, especially in the eastern states meant that net worth for households in these states rose again, which was not the case in WA, NT or SA.

Sentiment in the property sector is clearly a major influence on how households are feeling about their finances, but the real dampening force is falling real incomes and rising costs. As a result, we still expect to see the index fall further as we move into spring, as more price hikes come through. In addition, the raft of investor mortgage rate repricing will hit, whilst rental returns remain muted.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

 

Household Finance Confidence Breaks Down

Digital Finance Analytics has today released the Household Finance Confidence index to June 2017, and the news is not good. Overall the index has dropped below the neutral setting and appears to be trending lower. The current reading is 99.8% compared with 100.6 in May.

The fall is being driven by a confluence of issues, none new, but now writ large. Households are seeing the costs of living rising (especially power costs, child care costs and council rates), whilst household income remains depressed and is falling in real terms. Returns on deposits actually fell as well, so mortgage repricing is not being matched by better saving rates. The costs of mortgage repayments rose.

The most significant fall in confidence was in the property investor segment, where loan repricing has been more pronounced, whilst rental incomes are hardly growing. They are also concerned about slowing capital appreciation. However it is still true that property owners have their confidence buttressed relative to property inactive households who are more likely to be renting, and see no rise in their net worth.

Looking across the states, confidence is still highest in the booming states of NSW and VIC, though down a bit; whilst WA is recovering a little from lows earlier in the year.

Looking at the scorecard, households are more concerned about the amount of debt they hold, real incomes continue to fall and costs of living continue to rise. This despite job security not being a major concern. Take home pay however is.

We expect to see the index fall further as we move into spring, as more price hikes come though (e.g 20% uplift in electricity for many). The raft of mortgage rate repricing still has to work though and income growth will remain contained. Sentiment in the property sector is clearly a major influence on how households are felling about their finances, but the real dampening force is falling real incomes.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

 

Household Finance Security Wobbles Again In April

Today we release the latest monthly edition of our household finance confidence index for April 2017, which show a fall from 102.5 to 101.5, just above the neutral setting.

The index is drive from the results of our household surveys, and highlights some important movements, mostly related to the recent changes in the property market.

Property Investor levels of confidence weakened, thanks to rising mortgage interest rates and concerns about property prices and pre-budget speculation about changes to negative gearing. In fact owner occupier households are now more confident than investors. As usual households without property interests have a significantly lower level of confidence about their financial status.

The results by state shows that NSW leads the way, with households there still enjoying the glow of stronger employment and economic growth, to say nothing of high home prices. More people of course own property than not. VIC continues to weaken, costs of living appear to be accelerating there (especially child care and school fees, plus energy and council rates). Most other states saw a small rise, though from a position below the 100 neutral point. The divergence across the states is becoming more extreme.

Looking at the scorecards, whilst job security is about the same, households were less comfortable with their savings, and debt. Mortgage rate rises are working their way through, and many households with deposits in the bank are still seeing lower returns.

Falling real incomes are a strong factor in the mix, together with rising costs of living. these combined explain the rise in mortgage stress. Net worth is still improving thanks to home price appreciation, other than in WA, regional QLD and TAS.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

 

Household Finance Confidence Wobbles

Digital Finance Analytics has released the latest edition of the Household Finance Confidence index, to end March 2017. The index fell slightly to 102.5 from 103.4, but is still slightly above a neutral setting.

Looking at the property segments, we find that whilst owner occupied households are a little more confident, property investor confidence fell, thanks to the recent noise about rising mortgage rates, possible changes to tax breaks and questions about future capital gains.

Looking across the states, confidence remains highest in NSW, but fell slightly in VIC. There were slight improvements in the other states.

Here is the scorecard which drives the index. Most striking is the fall in real incomes and small rises in concerns about job security. As interest rates rise, more households are concerned about debt. Despite this, property owning households saw their net worth rise.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

Household Finance Security Index Higher Again In February

We have published the February 2017 edition of the Digital Finance Analytics Household Finance Confidence index (FCI) today, which shows a further small rise from the January 102.7 to 103.4. This is above the long term neutral setting, and after a significant dip in the past couple of years, the FCI is maintaining positive momentum.

However, the positive boost in predominately centered on momentum in the property market, with both owner occupied and investment property holders in positive territory, whilst those excluded from the property market, including renters and those living with family or friend get none of the upside, so their financial security is degrading further. This highlights the risks if the property market momentum were to reverse, and the bind that regulators face at the moment – do you keep the current settings and allow the market to continue to run, or tighten and risk reversing household sentiment and thus spending?

The state by state picture shows how uneven the confidence is, with households in the eastern states significantly more positive that in WA or SA.  WA grinds down, thanks to the pressure on the economy there, falling home prices and flat to falling incomes. Will the election result today make a difference?

Finally, here is the scorecard, which shows that real income in under pressure (up 1%), costs of living are rising (up 1%), concerns about debt levels are up a little (thanks to recent rate increases) but net worth is being bolstered by strong home price growth and rising stock markets.  The property sector is firmly linked to household confidence, and vice-versa.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 26,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

Consumers won’t react the same to higher interest rates

From The Conversation.

The Reserve Bank today kept interest rates at a record low of 1.5%. Such low rates create economic uncertainty – and if Australia’s historical GDP growth is anything to go by, consumers face more uncertainty than the bottoming out of interest rates would usually suggest.

This is because high house prices lead home-owners to feel wealthy, yet the economy as a whole does not convey a message of wealth to all consumers.

Boom and bust come and go, and sometimes you can be forgiven for feeling economic déjà vu. But how might Australians react to record low rates this time around? Business moves in cycles over time, so economists sometimes look to history as a guide to what might happen next.

A flattening out of interest rates can mean many possibilities for consumers and businesses. Historical GDP growth rates would indicate that the business cycle is at the same stage as in 2011. But what this means for consumers depends on how the other economic “stars” align. The indicators from 2011 are able to provide a model of how consumers may react over the coming years.

Does 2011 provide a model?

The relationship between interest rates and unemployment has been of interest since target interest rates were introduced in 1990.

The rise in unemployment from 4% to 6% between July 2008 and May 2009 occurred at the same time as the Reserve Bank rapidly slashed the target interest rates.

However, with the Reserve Bank now unlikely to reduce interest rates any further, the impact on unemployment and other pointers for consumer behaviour may be different this time compared to 2011.

To predict consumer behaviour in the current uncertain conditions, the most appropriate method would be to consider past situations where GDP has gone up, and reflect on changes to key consumer indicators.

Based on Australia’s current GDP growth rates, and those of the last few decades, we are most likely at the “February 2011” stage of the business cycle – when growth was at 1.9%.

Based on the business cycle method of anticipating future consumer indicators, we would expect the trend to continue. Consumers would save the same or less of their income. And consumer sentiment would remain flat.

However, with property prices at all-time highs in capital cities, it is possible this will counteract rising interest rates when it comes to consumer expectations because there are conflicting messages. On the one hand, consumers feel wealthy because of property prices. However, they are expecting their mortgage repayments to increase when interest rates start to tick up.

In this environment it is expected that unemployment remains steady, as it has since 2009, with the sharemarket remaining flat. It is expected that as the sharemarket remains flat (or modestly increases) across developed countries, the price of gold continues to rise.

We can make these sorts of predictions, if 2011 is a guide to what will happen in the coming years.

ASX

But using 2011 as a benchmark to help predict future trends relies on the basic academic assumption that the points of reference (2011 and 2017) are identical. The world of 2011 was vastly different from the world today – it was almost naively uncomplicated.

Further dampening effects?

The differences between 2011 and 2017 will likely result in further dampening effects on the economic recovery. One of the major potential dampeners is Australia’s relatively high level of government debt.

The reduction in government debt in 2007 occurred almost simultaneously with the global financial crisis, higher consumer saving rates and a steady decline in GDP growth each quarter.

Hence, core economic fundamentals (such as how cutting government spending when the economy is already shaky will likely result in a greater negative GDP impact than when the economy is strong) deem that if the current government takes steps to reduce debt, this could have further dampening effects on the economy. This is despite a bottoming out of interest rates, which indicates the economy is projected to be on the way up.

Today’s world poses many challenges to forecasting how consumers will behave. One of the primary issues is high levels of debt (both for consumption and for property), which means a rise in interest rates will directly impact Australians. However, high property markets give consumers a feeling of wealth, despite the extreme lack of diversification across asset classes, and property that is hard to sell.

These competing forces mean consumers are likely to view formal government announcements with more scrutiny. As statements are made about improving economic prospects, individual consumers are feeling financial strain.

Combine these forces with increasing market complexity, product advances, geopolitical issues and climate change, and a certain level of unease is weighing on Australian minds, which goes over and above the likely increase in mortgage repayments.

A lot has changed since 2011

Technology disruptions are likely to further reduce trust in institutions, particularly banks, but may ultimately give consumers a greater feeling of empowerment and control.

In 2011, technological financial disruption was just a sparkle in Bitcoin’s eye. Now, technological disruption covers every sector imaginable. Many consider the future economy will be the collaborative economy.

The collaborative economy is one in which consumers and businesses share their resources (for a fee). This increases efficiency and saves cost to the end consumer.

For example, AirBnB (the largest accommodation provider in the world, which owns no accommodation) connects people who have extra space with travellers who are seeking an authentic, low-cost experience while travelling.

If the shift toward the collaborative economy continues, large institutions – particularly banks – will find it more difficult to make the significant profits they are used to.

Since 2011, consumers across the world have shifted to more community-based banking systems and have lent directly to others to achieve higher interest rates than bank deposits – particularly in a low-interest-rate environment. This trend is likely to continue.

Coupled with decreasing trust in institutions, it makes it unlikely that the predicted trends will be identical to those in 2011.

Author: Lecturer in Accounting, Finance and Economics, Griffith University