Household Finance Confidence Index – Page 6 – Digital Finance Analytics (DFA) Blog

Booming consumer confidence supporting rate rise

Aussies enter 2017 on a four month high amid increasing expectations that the RBA will raise the cash rate

Consumer confidence is at its highest level since August, ANZ-Roy Morgan’s Consumer Confidence index has found. The index for the week ending January 8th had a score of 120.1, up 4% compared to 2016’s average confidence and significantly above the long term average of 116.5 since 2010.

Australians are feeling more positive than before about their family finances and the state of the Australian economy over the next five years, and have gone from a negative to a positive outlook for the economy in the next 12 months. Significantly for brokers, the level of confidence in reply to the question ‘do you think now is a good time – or a bad time – for people to buy major household items?” shot up from +28 to +41.

Consumer confidence is also important because it is one of the measures the Reserve Bank uses to keep track of the economy and set interest rates. Referring to both the Roy Morgan index and encouraging figures for retail trade, CommSec analyst Savanth Sebastian commented that “a number of indicators make rate cuts look less likely than even six months ago.” With inflation likely to rise in 2017, Sebastian argued that “it is unlikely that the Reserve Bank will be looking to cut interest rates further.”

Banks have already raised their fixed rates in expectation of the RBA eventually raising rates, for over 200 loans, according to research by CANSTAR and the AFR. Consumer demand for fixed rates has also increased – now comprising 22% of all loans written at Mortgage Choice – as consumers expect variable rates to increase. The earliest possible opportunity for a cash rate rise and subsequent changes in variable rates would be 2017’s first RBA monetary policy board meeting on Tuesday 7th February.

Household Financial Confidence Higher as Rates Fall

We release the October edition of the Digital Finance Analytics Household Finance Confidence Index (FCI) today. Overall average confidence is up again, as a direct response to the RBA rate cut, and property owning households are the more confident. The index reached 98.2, up from 97.1 last month, and is trending towards the long term neutral setting. Property Investors and Households with Owner Occupied property continue to move above the neutral setting, thanks to continued capital appreciation (in most centres) and lower mortgage rates and some rises in term deposit rates. Those without property interests drag the average down, highlighting again how important property is to household finances.

On a state basis, NSW and VIC are most positive. WA the least positive, reflecting falls in home prices, rising rental vacancies and less appetite for property.

Household income, in real terms remain in the doldrums, putting more pressure on those with larger mortgages.

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.

Household Financial Confidence Improves, If You Hold Property

The latest edition of the Digital Finance Analytics Household Finance Confidence Index (FCI) to end September 2016 is released today. Using data from our household surveys we examine how households regard their overall financial position. The composite index rose from 95.8 in August to 97.2 in September, the highest reading for a couple of years, though still just below its 100 neutral setting. It is dragged down by households excluded from the property market.

This average national score masks some important differences. First, the score varies by state. Households in NSW and VIC are now above the neutral setting, thanks to improving job prospects, rising home prices, and lower interest rates on mortgages. With stock markets on the rise, the only negative indicator in these states is low returns on bank savings (which is encouraging more to look at investment property) and high debt. Costs of living, though rising, seem largely manageable.

There is a different story in WA and SA, where unemployment is a higher risk, property prices are muted, and debt remains high. QLD sits between the two extremes, with households in and around Brisbane mirroring the results in NSW, whilst regional QLD is mirroring WA; a state divided. In these states, costs of living are more of a concern.

Looking at the results by property owning segmentation, owner occupied home owners are the most positive about their financial position, thanks to the increasing wealth effect of rising home prices, in an ultra-low interest rate environment. Property investors are increasingly confident, thanks to better than expected capital values, lower interest rates and no disruption to capital gains or negative gearing policy. The only shadow on their horizon is flat rental incomes and poor tenant behaviour.

However, one quarter of households are property inactive – mainly in rental accommodation, or living with friends or family. They are excluded from the wealth effect of property. With incomes static, the costs of rent, alongside other costs of living, kept their scores much lower (and indeed take the national average below its neutral setting). Take property inactive households out of the equation, and the remaining groups would be well above the neutral setting. Your property owning status determines your wealth footprint – no wonder people aspire to get on the property ladder, at almost any cost!

Finally, we look at one of the specific dimensions in the survey. This month we look at debt exposure. Two thirds of borrowing households are as comfortable with the debts they hold as a year ago (bigger debts, but lower interest rates). Around 7% are more comfortable than a year ago, and 24% less comfortable, driven by finding it more difficult to service their debts in a low income growth, high cost growth environment. Remember, interest rates are very low at the moment, so this level of debt pressure remains a concern. If rates were to rise, pressure on these households would rise, fast.

Household Cash Flows and Monetary Policy

The RBA released the September 2016 edition of the Bulletin today. The article “The Household Cash Flow Channel of Monetary Policy by Helen Hughson, Gianni La Cava, Paul Ryan and Penelope Smith is interesting, but possibly flawed.

It looks at the impact of households when the cash policy rate is changed. Lower interest rates can encourage households to save less and bring forward consumption from the future to the present (the inter-temporal substitution channel).

Lower interest rates can also lift asset prices, such as housing prices, and the resulting increase in household wealth may encourage households to spend more (the wealth channel). Additionally, lower interest rates reduce the required repayments of borrowing households with variable-rate debt, resulting in higher cash flows and potentially more spending, particularly for households that are constrained by the amount of cash they have available. At the same time, lower interest rates can reduce the interest earnings of lending households, which may, in turn, lead to lower cash flows and less spending for these households. These last two channels together are typically referred to as ‘the household cash flow channel’.

The analysis in this article focuses on a fairly narrow definition of the cash flow channel. It examines the direct effects of interest rates on interest income and expenses, but abstracts from monetary policy changes that have an indirect cash flow effect by influencing other sources of income, such as labour or business income.

Household disposable income, or cash flow, comprises wages and salaries, property income (including interest paid on deposits) and transfers, less taxes and interest payments on debt. The household sector in Australia holds more interest bearing debt than interest earning assets. Indeed, households have increased their debt holdings at a rapid pace since the early 1990s, mainly due to an increase in mortgage debt. For the household sector as a whole, the level of household debt now exceeds the level of directly held interest earning deposits by a significant margin. However, since the mid 2000s, slower growth in household debt and increases in interest-earning deposit balances (including balances held in mortgage offset accounts) has led to a decline in net interest bearing debt. This means that the household sector is a net payer of interest. Household net interest payments increased through the 1990s and early 2000s, mainly reflecting the rise in net household debt, but trended down from 2007 as interest rates and net debt declined.

The data shown above do not account for interest earning assets held in managed superannuation accounts, which have increased substantially since the early 1990s. The majority of these assets cannot be accessed until retirement.

This article finds evidence for both the borrower and lender cash flow channels, but the borrower channel is estimated to be the stronger channel of monetary transmission. One reason for this is that while there are roughly similar shares of borrower and lender households in the Australian economy, the average borrower holds two to three times as much net debt as the average lender holds in net liquid assets. Another reason is that the sensitivity of spending to changes in interest-sensitive cash flow is estimated to be larger for borrowers than for lenders based on statistical analysis using household-level data.

Overall, the estimates suggest that the cash flow channel is an important channel of monetary transmission; the central estimates indicate that lowering the cash rate by 100 basis points is associated with an increase in aggregate household income of around 0.9 per cent, which would, in turn, increase household expenditure by about 0.1 to 0.2 per cent through the cash flow channel.

We have a couple of issues with their analysis. First, recent events have shown that when the cash rate is cut, the benefit is not necessarily passed through to households, thanks to weak competition in the banking sector. When it is, the benefit is often not equally shared between borrowers and savers, and not all savers benefit equally. In fact, looking at the trends in recent years, savers have been taken to the cleaners, as banks repair and protect their margins. So benefits are overstated.

The second issue is households will be impacted by the confidence surrounding a rate move. If they become less confident, they will be less likely to spend, preferring to save for later. So a rate cut often lowers household spending – this is one of the significant reversals we have seen recently – and central banks are still trying to get to grips with the implications. The link between low interest rates and household spending, yet alone broader economic growth appears broken.

So, whilst the article is a good attempt, we think it overstates the benefits of cash rate cuts in the current cycle.

Household Finance Confidence Holds

The latest Digital Finance Analytics Household Finance Confidence index, for July 2016 is released today. The index, which measures households’ attitudes to their finances, stands at 95.17, down a little from last month from 95.21, and below the long term average of 100. However, there are wide variations among households.

Households with savings in bank deposits were more confident, thanks to small, but significant uplifts in term deposit rates. We expect to see this continue, following the August RBA rate cut, and banks’ repricing of term deposits.

One factor of note is the ongoing fall in households who recorded real income growth in the past year. This is a drag on confidence, and spending. The small cut in mortgage interest rates will not help very much.

There are significant differences by property segment, with owner occupied households the most confident, thanks to falling interest rates and continued property price rises. Property investors also recorded a rise, thanks to rising property values, though trimmed by low rental income rises, and mortgage pricing. Property inactive households were the least confident, not least because with incomes flat many are finding it tough to make rental payments on time. They are not able to particulate in the wealth effect of holding property.

There are also variations across selected states. Households in NSW and VIC are the more confident, thanks to relatively good employment prospects, and stable living costs. Households in WA and SA are more concerned, with issues such an employment and living costs in mind.

Household Financial Stress Increases – ME

ME’s tenth 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% as at June 2016.

‘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.

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 notable increase in households expecting to be unable to service their debts, despite record low borrowing costs.

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.

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

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 reported the highest comfort level of any city at 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.

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.

In terms of generations1, 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).

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

Household Finance Confidence Improves In June – DFA

The latest edition of the Digital Finance Analytics Household Finance Confidence Index to end June is released today. Overall confidence improved again, to 95.21, although this is still below the long-term neutral score of 100 which we fell below in 2014.

Despite Brexit, the indecisive election result, and stock market volatility, the average financial confidence all household split by property segments improved, with property active owner occupied households now above neutral, thanks to ever lower mortgage interest rates, and positive news on home prices in the major states of NSW and VIC. Property inactive households were a little more positive too, thanks to rental increases being contained and food costs down a little. Property investors are also positive, thanks to lower interest rates, and better access to mortgage funds at good prices. Intention to purchase property has improved, thanks to continued capital gains, lower mortgage funding costs and net perceived better returns than stocks or deposits. Future price growth expectations also rose.

The state variations are quite stark however, with NSW and VIC improving strongly, whilst WA languishes, thanks to flatter home prices, and rising unemployment. Variations across the regions were even more extreme.

Income, in real terms, continues to fall for many. Those reliant on interest from bank deposits were hardest hit, with average rates for many falling. Further drops in returns on deposits will force many to consider alternatives, including property.

Household Financial Security Index Rises, Significantly

The latest edition of the Digital Finance Analytics Household Financial Security Confidence Index (FCI) is released today, to end May 2016. It shows a significant rise in overall confidence levels, up from 89.2, to 94.7 although this is still below the neutral score of 100, which we fell below in 2014.

A number of elements explain the improvement. Looking first at the index by property segment, we see that the property active investor’s score continue to improve, thanks to rising home prices, the likely negation of changes to negative gearing post the election, and falling interest rates on loans. This reflects the heightened demand we identified in our last set of survey results. The owner occupied home owners score also bounced back, thanks to the cash rate interest rate cut in May feeding through into prospective lower mortgage repayments. Even property inactive households were more confident, and this is associated with recent more positive economic news, and lower rental rates. This break-out trajectory suggests we could be above the long term neutral position soon.

This video blog goes though the main points:

But, then again, within the index, we see some more concerning signs. First, stagnant incomes are confirmed, with almost no households reporting real income growth, and around 45% saying their real incomes have fallen.

We also noted concerns about the level of income from bank deposits as rates fall, and banks try to manage their net interest margin. I am surprise there is so little coverage of the real impact of falling interest rates on those relying on savings, despite the large number of households which are impacted; all the focus is on property and shares. This fall in rates proportionally impacts more older households.

We also see rising child care costs hitting large numbers of younger households as the latest changes work through.

Finally, we see that households in regional WA and QLD are significantly less confident thanks to pressure on home prices and higher levels of mortgage stress, whereas in NSW and VIC households are relatively more confident. Here they are close to crossing the 100 point Rubicon.

Property Investor Confidence Lifts

The latest edition of the Digital Finance Analytics Household Finance Security Index, to end April, released today, shows a lift from 88.14 to 89.20. This is still below the long term neutral score of 100, but is the highest score so far this year.

Of note is the significant spike from 89.67 to 92.45 in confidence among property investors, thanks to the Government stance on negative gearing, the expectation of interest rate cuts, and better news on home price growth. Investor households in NSW and VIC improved the most. Property active owner occupied households saw a small lift from 95.43 to 95.93, thanks to the expectation of lower mortgage rates (though offset by lower returns from those with deposits). Improved stock marker performance assisted. Once again, stronger positive scores in NSW and VIC were somewhat offset by noticeably weaker scores in WA and QLD.

Overall costs of living were flat. We saw a further fall in those who had received a pay rise whilst those with property on average saw their net worth rise again.

There was a noticeable fall in those households who are not property active – either renting or living with family or friends. On average their score fell again, from 84.3 to 83.5. These households are more exposed to costs of living (including rising rentals), have no leverage to the rising property market and are more stressed financially than property holding segments. Around one third of households fall into this group.

Household Finance Confidence Still Low In March

The latest data from our Household Finance Confidence Index showed little change in the month of March 2016, moving from 88.11 to 88.14 when averaged across all households. As the findings from last month therefore remain current, this will be a brief update this time around. Confidence is still below the neutral setting of 100, where the index has been since 2014.

Within the property segments, we saw little change in owner occupied households whilst there was a small rise in property investor households confidence, as talk of negative gearing changes dissipated and property price growth remained quite robust, this despite offsets created by rising interest rates. Property inactive households remained the least confidence, especially as rental growth is still above income growth, so housing is becoming ever more expensive.

Overall households budget expectations were mixed, thanks to the general policy confusion/vacuum which currently exists.

We also saw some small improvements among households with deposit savings, reflecting small improvements in rates of return. In contrast, those with stock market investments were more concerned about current returns as markets remained volatile.