Based on a survey of 1,500 Australians conducted by DBM Consultants in June 2016, the 10th biannual Household Financial Comfort Report shows that of the 65 per cent of households with outstanding debt, 10 per cent expect they won’t be able to meet minimum debt repayments in the next six to 12 months.
This is a twofold increase since December 2015 and the highest since the survey began in late 2011, a marked deterioration in Australian households’ confidence in their ability to manage debt over the next six to 12 months.
Consistent with an expected rise in debt stress, more households ‘paying off or owning a home’ reported drawing on their home equity to ‘pay off debt’ and ‘to make ends meet’ during the first half of 2016.
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.
“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.
“The findings add to a number of recent policy debates, such as changes to superannuation. As many as 45 per cent of baby boomers said they expect to be worse off after the recent federal budget,” Mr Oughton added.
Baby boomers rated themselves as the hardest hit, with perceived comfort falling the most of any generation (down seven per cent) to the lowest level reported for that age cohort in the past couple of years – lower than Gen Y, but still above Gen X.
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. The specimen 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’.
Single parents, on the other hand, reported the highest levels of concern in their ‘ability to meet minimum debt repayments over the next six to 12 months’ (19 per cent), followed by ‘couples with young children’ (15 per cent) and ‘young singles/couples’ (12 per cent).
Full-time self-employed workers were the only work segment to experience a rise in financial comfort 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 per cent and 16 per cent 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). Consistent with falls in comfort with these key drivers were increased concerns around ‘job availability’, ‘job security’, and ‘adequacy of income’.
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.
South Australia was the most financially comfortable mainland state in Australia, rising two per cent to a historical high of 5.74 out of 10, while all other mainland states experienced a fall.
Comfort levels in Western Australia fell two per cent to a record low of 5.02 out of 10. While financial comfort in Victoria as a whole experienced a six per cent 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 two per cent, and still well ahead of Sydney, which reported a four per cent drop to 5.58 out of 10.
Overall, 35 per cent of households reported they would be ‘worse off’ as opposed to a slim 14 per cent that believe they could be ‘better off’ when asked about the ‘expected impact of the 2016/17 federal budget on their overall financial situation over the next year’, whereas the remaining 50 per cent of households said their financial situation would remain ‘about the same’.
This result means about 90 per cent of Australian households reported low-to-mid financial comfort, with only 10 per cent reporting high comfort. All 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’.