Australia's Household Trends
Household consumption serves as a cornerstone of Australia's economic activity, heavily influenced by monetary policies that shape aggregate outcomes and guide policy decisions.
This analysis delves into recent consumption and income trends among diverse household demographics, acknowledging that individual experiences often diverge from overarching averages. While long-term consumption patterns are typically dictated by household income and wealth, deviations can arise due to economic uncertainties or social constraints.
Despite short-term disruptions, consumption tends to normalize over time. However, the past year has witnessed a noteworthy deceleration in consumption growth, largely attributed to a substantial 5.5% decline in real disposable income, the most significant drop observed in three decades. Factors contributing to this decline include elevated inflation rates, heightened tax burdens, and escalating net interest payments, despite notable growth in labor income.
Interestingly, real household wealth has experienced significant expansion, propelled by surging housing prices and a surge in pandemic-related savings. While these additional savings constitute a modest fraction of total wealth, they have played a pivotal role in bolstering liquid assets, such as bank deposits.
An examination of developments across various household income levels and housing tenures in Australia unveils crucial insights into the intricate dynamics of the economy. While individual disparities persist within identical income quintiles or housing tenure categories, common pressures manifest among households within specific classifications. Lower-income quintiles, characterized by annual incomes up to $70,000, predominantly comprise renters or outright homeowners, with mortgagors prevailing in the upper two income quintiles starting from $84,000.
Real disposable income growth has remained feeble or negative across most household groups, primarily due to uniform inflationary impacts on incomes. Disparities in nominal income growth, particularly pronounced in lower income quintiles, contribute to variations in real income growth rates. Retirees within the lowest quintiles benefit from pension indexation and higher interest rates, safeguarding their real incomes. Housing expenses, influenced by rent and mortgage escalations, affect disposable incomes differentially across income and tenure categories.
Housing costs exert a more pronounced impact on higher-income quintiles with a greater proportion of mortgagors. Median mortgagors have experienced elevated mortgage payments, culminating in a 15% decline in real disposable income. Renters also confront challenges, contending with a 4% reduction in real disposable income attributed to elevated inflation and escalating rents. Conversely, outright homeowners, unencumbered by rent or mortgage obligations, encounter distinct cost dynamics.
It's imperative to note that the estimates presented are based on modeled changes and exhibit a wide spectrum of outcomes within each group. While higher-income households possess greater flexibility in adjusting saving and consumption patterns, lower-income households, especially renters, may grapple with financial strain due to essential expenditures and housing expenses. Notably, community services have reported a surge in inquiries, predominantly from renters, with an escalating number of mortgagors seeking assistance, an indication of heightened budgetary pressures.
Nominal spending growth has decelerated across all household cohorts, encompassing income quintiles and mortgagor statuses, notwithstanding divergent income pressures. The lowest income quintile has displayed a relatively resilient decline in spending growth over the past year, driven by employed households and a substantial contingent of retirees benefitting from government transfer indexation. Retirees have also exhibited a slower decline in spending growth, potentially reflecting heightened caution in resuming discretionary expenditures following the relaxation of social restrictions.
Higher-income groups and mortgagors faced larger falls in real disposable incomes but could draw on substantial financial buffers to mitigate the impact on spending. These buffers include the flow of savings and wealth, particularly housing assets. Higher-income households tend to have higher savings rates and greater scope to adjust saving to support consumption during income declines. Outright homeowners, in addition to substantial housing assets, tend to have more liquid savings, while mortgagors, being wealthier, rely on sizable offset and redraw account balances. Some mortgagors have been using these accounts to finance regular spending, with evidence of drawing on offset accounts for this purpose.
Source: https://www.afr.com/property/residential/house-price-growth-to-slow-to-4pc-as-rates-bite-20231228-p5eu1b