Tag: DFA FCI

The latest data from our household surveys to the end of February 2020 shows that the impact of Covid-19 are hitting home. The index dropped again, into uncharted territory, to an all time low of 80.2. I even had to change the scale of the chart to accommodate the fall!

We ask households to compare their levels of confidence today compared with a year back across a number of dimensions, from job security, income, costs of living, debt, savings and overall net wealth (assets less debts). This gives us a comparative series from the 52,000 households in the rolling sample.

Households are reacting to the uncertainty about the future trajectory of the economy, and recent survey results (we run a rolling series to the 5th March), have captured recent stock market falls. The falls are broad based, though households with a property remain relatively more positive, believing that property remains largely immune – we will see.

Within the property segmentation, property investors are on the mat now, as rentals continue to grind down, and property values especially among units have not recovered as much as the generic indices may suggest. Households renting are finding more choice, and lower rents in a number of centres (Hobart excepted). Supply is quite strong.

Most states moved lower, with NSW and VIC taking quite a hit this past month. NSW at 84.9 is the lowest scored state now, thanks to the higher debt leverage there where large mortgages predominate. WA, QLD and SA are bunched higher at around 90.

Across the age bands, we see falls across the board. The financial pressures on younger households of 20-30 and 30-40 are piling up as they continue to feel the issues most severely, older households are buttressed a little more by share portfolios (which are falling) and savings (where rates are falling). But all ages bands fell this month.

Within the index we can look at the elements which drive the scores. Job security slid 1.66% compared with last month with just 4.3% saying they feel more secure than a year ago. 38% feel less secure, an increase of 1.1% from last month, and 47% about the same. The full potential impact on jobs has yet to be absorbed by the community, but around 3 million are working in gig type “flexible” roles. And others will be “encouraged” to take leave to try to stem cash flow issues among businesses.

Households are taking a beating on savings at the bank, with rate cuts eroding returns to the point many households are not getting enough income to cover the basics. And the stock market is off (and falling as I write), with the supply side shock of the virus now translating to a potential liquidity crisis. Safe havens are hard to find for the fortunate few who have savings. Many of course have none and live from pay credit to pay credit.

The cost of debt is falling, so many are seeking to refinance (again) to grab the lower rates available to some. However, only 4.2% are more comfortable with their level of debt compared with a year back, and of course if income from employment falls, paying the mortgage becomes a nightmare. 42.5% are less comfortable than a year ago. Those who recently obtained new mortgage finance appear to be in for the biggest shock thanks to looser underwriting standards of late.

Pressures on incomes remain centre stage with just 1.7% of households saying their real incomes have risen in the past year. More than half of households have seen their incomes fall in real terms over this period, and 40% see no change. Incomes will evaporate for many should the supply side shocks continue.

Costs of living on the other hand continue to bite, with more than 95% of households reporting rising costs over the past year. 5% reported no change, almost no households reported they had fallen. Categories of costs which are impacting including the usual suspects, from energy, fuel, child care and health case costs, plus council rates. But the most insidious are those relating to everyday expense at the supermarket, where drought related hikes abound. The falling exchange rate is also hitting some imports and making them more expensive. Around 25% of households have less than 1 months cash available to meet their commitments if they income seized up.

Yet, overall, the net worth of households improved slightly, with property values higher in a number of locations, though recent stock market falls are dragging wealth down for some.

The big strategic question now is whether the Government understands the true significance of what is happening. Whilst they are talking up a $10 billion package, it appears to be shaping towards investment allowances and other tactical measures. In fact, the level of confidence we are recording in our surveys suggests that households will not be able spend (consumption being a significant share of the economy) and many small businesses will struggle to employ, yet alone survive. The quantum they are discussing is too little too late. I expect confidence to erode even more as things play out and the true horror the economic predicament we are in hits home. And then the following financial crisis also strikes.

The latest results from our household surveys revealed that household financial confidence recovered just a little in recent weeks, but is still in ultra-low territory and well below the neutral 100 measure, at 81.4.

So far, the impact of virus concerns have not translated into households finances, whereas the bushfires, floods and other local events are having a more direct impact.

Across the property segments, owner occupied households are the most positive, thanks to rising prices in some locations and lower interest rates on some mortgages. Property investors and those renting remain more bearish, as rental costs continue in the doldrums.

Across the states the recent trends continue, with both NSW and VIC households under greater financial pressure compared with WA, QLD and SA. Much of this is debt related as the average mortgage size grows ever larger in the two largest states.

We continue to see pressure among younger households building relative to those in the older cohorts. Much of the pressure comes from housing costs one way or another.

Those mortgage free and owning property are relatively better placed than those with a mortgage, or renting. This is because housing costs are such a large element in a budget whether servicing a mortgage or paying rent.

Looking in more detail at the moving parts, living costs continue to rise disproportionately, thanks to more expensive fresh food (drought related), child care and school fees rising fast, accelerating healthcare costs and continued high energy and fuel costs. 95% see their costs higher than a year ago. More are having difficulty with council rates and other regular commitments.

Income growth is muted at best, with 51% saying their income has been reduced in real terms over the past year, with both wages growth sluggish, and income from savings on deposits crashing as the cash rate is cut, and banks squeeze margin. Returns from share investments on the other hand are doing better. Those with spare income are preferring to pay debt down, rather than spend.

Job prospects are also sluggish, with just 6% feeling more secure than a year ago, while 38% are feeling less secure. We continue to see a pattern of multiple jobs, rising part-time jobs, less overtime and gig economy roles on the rise; all creating greater concerns about job security. Underemployment remains a critical issue for many.

Turning to loan finances, some have been able to refinance to lower rate mortgages (and others appear to be missing the opportunity to switch and save), while some households are unable to transfer to a lower rate thanks to underwriting constraints. Households are able to grab a larger loan now lending standards have been loosened. Lower rates mean that 42% remain about the same with regards to confidence, while 45% are less comfortable than a year ago. We also note a rise in the use of unsecured debt, and buy-now pay-later (which will be the subject of an upcoming article based on new data we have captured). De-leveraging continues among those who can afford it.

On the savings front, those with market investments continue to enjoy paper capital growth, while dividends remains relatively stable. But those with term deposits continue to see rate compression and there is a move from term accounts to call accounts as the margin between the two have fallen further. More than 3 million households rely on income from bank deposits, and the reduction in the returns from deposits is having a dramatic impact on many. That said, many households remain adamant that they do not want to take on more market risk, so reluctantly accept lower income – which in turn flows to lower spending. 43% feel less comfortable than a year ago. Many are dipping to savings, and using capital for living expenses, something which may not be sustainable.

Finally, putting all this together we look at net worth – assets minus loans and other liabilities. The upturn in home prices reported in the media have flowed through to more expectations of growing wealth. 28% now have higher net worth than a year ago. That said 47% have lower net worth, thanks to rising expenses, and little in the way of savings. 24% reported no change. We note some significant differences between the more affluent segments and suburbs where net worth is rising (and supported by rising market investments) compared with regional areas and the urban fringe where there is no evidence of any wealth effect – so far. This is continue to dampen spending.

So, to conclude, we appear to have reached something of a floor in household financal confidence, but the journey back to more balanced settings will only be achieved once real incomes start to rise. Meantime the property recovering and wealth illusion may help a bit, but there is little here to suggest a rise in consumer spending. Many households are trapped in a high housing cost situation (either mortgage debt or rent) and with continued pressure in costs of living, the pressures will remain for some time to come.

The question is, what if anything might break the trend? Well income growth if it came, would assist on the upside, but then if growth stalls further thanks to the second order impacts from the virus, the confidence floor might just disappear. Households are in a finely balanced predicament.