The latest edition of the DFA Household Finance Confidence Index for October 2015 is released today, and shows a noticeable uptick compared with last month. The current index stands at 90.7 compared with 87.7 in September, still below the long-term neutral position, but on the improve. Taken with the stronger employment data, released today by the ABS, we think there a potential drop in the cash rate is off the table, unless there is an external shock. Should the US lift rates in December this would be another nail in the rate cut coffin.
The 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.
Looking at the segmentation of the index, property inactive and owner occupied households improved compared to property investors who were more concerned about rising mortgage rates, and lower property price growth. They are also being hit by lower rental returns. This shows the importance of the property sector on overall confidence.
Overall, at a national level, 61% of households said their net worth had improved, up 1.1% from last month, and still being supported by rising property prices in the eastern states. 13% of households said their net worth was lower, and these were impacted by lower stock market prices, and some property price falls in WA and SA.
Looking at cost of living, there was a fall in those who said their costs were higher at 35%, compared with 40% last month, mainly due to lower prices for some foods, fuel, and low interest rates. 60% said there was no real change.
Looking at real income, 5% said they were better off, a slight rise from last month, whilst 55% said their real incomes had stayed the same over the past year (this is after inflation), very similar to last month. 38.7% said their incomes, in real terms, had fallen.
Next we turn to debt. Here 13% were more comfortable (up 1.8% from last month) with their levels of debt, whilst 26% were less comfortable, and 58% about the same, close to last months results. The small hikes in mortgage rates have yet to hit, so we will see if the score changes next month. However, absolute low rates are helping, and future expectations for interest rises appear more subdued.
The status of savings showed that 15% were more comfortable, up 2.4% on last month, thanks to deposit returns stabilising, and dividends holding up.
Finally, job security improved, with 17% saying they felt more secure (up 0.7%), and 63% saying they felt as secure as last year, similar to last month. However, there was a more negative note in WA, and on an aggregated national basis, 20% of households were less secure, up 1% on last month. Better employment prospects showed through in NSW and VIC.
So, we think there is a change of momentum in the index, and unless there is some external shock, the index is likely to climb as we enter the summer months. One factor which came though in the data was a more positive expectation about our political leaders, and this is flowing though to improved confidence.
