Are Australians better off financially now?

by Sarah Megginson31 Aug 2020

Australians have never been more financially comfortable – at least according to the data released in a new report from ME Bank.

The key findings of ME’s 18th Household Financial Comfort Report, a bi-annual survey that quantifies how comfortable Australian households feel about their financial situation, showed that household financial comfort increased 3% to 5.76 out of 10 in the six months to June 2020 − just shy of the historical high of 5.78 recorded in December 2014.

The surprising report revealed that the flood of government stimulus, combined with the prudent financial actions of households in response to the COVID-19 pandemic, has pushed the nation’s household financial comfort to a near-record high.

Financial comfort has jumped the greatest among those who typically struggle the most, such as casual workers, the unemployed, low-income households and single-parent households, though their comfort levels remain much lower than those of the average household and higher-income Australians.

ME’s consulting economist, Jeff Oughton, says almost all 11 measures that make up the Household Financial Comfort Index showed improvement, most notably ‘comfort with the ability to cope with a financial emergency’ (up 9% to 5.25 out of 10, the best level on record) and ‘cash savings’ (up 8% to 5.48 out of 10).

Jeff Oughton, consulting economist, MEJeff Oughton, consulting economist, ME

“Fear of COVID-19 and a very weak labour market triggered many households to increase precautionary savings, reduce spending, draw on long-term savings, such as superannuation, and delay bills or loan repayments,” he says.

“In June, 57% of households ‘spent less than they earned each month’ – up 8 percentage points to the highest level of households saving since the survey began nine years ago. However, paradoxically, this cautious behaviour and a lack of spending may cause a negative knock-on effect to the economy and a deeper recession.”

“In June, 57% of households ‘spent less than they earned each month’ – up 8 percentage points to the highest level of households saving since the survey began nine years ago” Jeff Oughton, consulting economist, ME

While government stimulus packages such as JobKeeper and JobSeeker have bought some time and helped boost the financial resilience of Australian households for now, Oughton is concerned about what will come next as government support tapers.

“Unless the economy gains momentum, tapering government support too soon could have disastrous consequences on the financial comfort of households,” he says.

“Financial comfort levels are up for now, but many households are on the cliff ’s edge. They’ve lost income, their jobs and entire livelihoods, their wafer-thin savings buffer is dwindling, and government support is the main action stopping them from falling over. This survey shows that the financial consequences for households of this pandemic remain critical. Many eyes will be on what governments do in the final months of 2020 and into next year.”

Chris Rands, portfolio manager, fixed income, at Nikko Asset Management, agrees that there is cause to be concerned, with unemployment now at a 20-year high, immigration non-existent, and interest rates having hit their lower bound.

Chris Rands, portfolio manager, fixed income, Nikko Asset ManagementChris Rands, portfolio manager, fixed income, at Nikko Asset Management

“Typically when discussing Australian housing, the narrative goes along these lines: ‘Yes, our house prices are some of the most expensive in the world, but we have strong migration, good affordability and constricted supply compared to other countries, which justifies the high prices’,” says Rands.

“Under ‘normal’ conditions, this argument holds water. But in the current climate, it becomes extremely questionable. As such, we look to the bigger-picture indicators – unemployment, immigration, fiscal support and interest rates – to glean the potential direction of the housing market.”

He says the largest risk to the property market right now comes in the form of unemployment, as Australia faces an unprecedented level of job losses. While the official unemployment statistics are evolving and not always a true representation of the market due to how job losses and employment levels are classified, some trends are immediately clear around the percentage of working-age Australians who are out of work.

“Around 3.5% of the working-age population lost their jobs since March, which does not include those who are currently on the JobKeeper program – around three million people. This is a decline of close to 700,000 jobs and is two times larger than that seen in the early 1990s recession and four times larger than the 2008 recession,” Rands says.

This huge level of unemployment has brought with it economic hardship that has required relief through the banking system. According to Australian Banking Association figures, almost 500,000 borrowers have been granted loan deferrals, and APRA has reported that about 10% of all home loans have been deferred.

“Support packages like JobKeeper have provided businesses with an essential lifeline since March, but the reality is, they aren’t long-term solutions” Patrick Coghlan, CEO, CreditorWatch

“The problem that this unemployment situation creates is twofold,” Rands explains. “Firstly, since the capital treatment for loan deferrals was originally given for only six months, each application will need to be reviewed by the banks come September. APRA announced in July that they would extend the deferral process [but] additionally stated that ‘in some cases, banks will need to recognise that loans are permanently impaired’.”

It’s not just households and residential borrowers who may struggle to recover. The business community is also in a lot of pain, particularly those industries that have been hardest hit by lockdowns, such as travel and tourism.

Patrick Coghlan, CEO of digital credit agency CreditorWatch, says that while many Australian businesses are showing resilience and strength in the face of economic challenges, others will take longer to recover – and some won’t recover at all.

Patrick Coghlan, CEO, CreditorWatchPatrick Coghlan, CEO, CreditorWatch

“Support packages like JobKeeper have provided businesses with an essential lifeline since March, but the reality is, they aren’t long-term solutions. Our survey data shows that 44% of businesses think they could be back up at pre-COVID cash flow levels within five months, which means ... businesses [will soon need to] stand – or fall – on their own two feet,” Coghlan says.

“In recent months there has been a significant drop in the number of businesses entering into administration. The number is down 36% year-on-year – equal to 1,200 businesses that in normal times would have entered into administration. The reality is that many are synthetically propped up, so at some point insolvencies will rise.

“Australian businesses have shown incredible resilience to date. While the reality is that not all will survive, my advice is for business leaders to arm themselves with the support and advice they need now, to successfully navigate their way out in the coming months.”