Rising cost of living & consumer insecurity hurts in more ways than one

Pulling in the purse strings has become the way of life for many Australian households these days.

Continuing global economic uncertainty and a less than stellar housing market have consumers feeling insecure about their own financial stability. Then there’s the rising cost of living; with utilities, groceries and petrol all gnawing a sizeable hole in our pockets.

In response, many of us have given up on a life of excess and consumerism that we embraced until recently, in favour of a more conservative approach to money.

According to an article in the Brisbane Times, thrift has become the new norm as Australians tighten their belts and throw money at their mortgages in an attempt to reduce personal debt.

This is a complete about turn on our previous attitudes toward using the family home as an ATM or a cash cow to be milked for things like holidays and new cars.

Instead we now use it as a piggy bank where we can squirrel away any extra cash.

Between 1992 and 2006, the lower interest rate environment we enjoyed saw many people tap into their home loans to buy that new fridge, big screen TV, flashier house and car, do some renovations and basically spend, spend, spend.

Forget keeping up with the Jones’s, it was all about outpacing them at breakneck speed!

As a result, housing finance expanded at a dizzying annual rate of 15.2 per cent and people were willing to pay whatever it took for that home they simply had to have, even if it did come with a record-breaking price tag.

Now though, spooked by the economic turmoil that’s turned much of the developed world on its head, more of us are interested in paying down our mortgages, almost doubling our minimum monthly loan repayments since 2008.

Debt has once again become a dirty word; annual housing credit growth has halved to 8.3 per cent and rather than borrowing and buying, we’re banking any spare cash we can get our hands on.

In the past four years, households have taken $50 billion out of equity markets and deposited an extra $210 billion in the bank.

What’s the effect of our savings habits?

This newfound frugality might be doing wonders for our own hip pockets, but it is causing local retailers, builders and yes, real estate agents, many sleepless nights as they worry about their own financial future.

According to BIS Shrapnel’s Robert Mellor, our reluctance to sink money into a new kitchen or bathroom upgrade or other home improvements, “is the sort of activity you see in recessions.”

That’s because renovation activity has historically been seen by industry experts as a reflection of overall consumer confidence and therefore has a direct impact on house sale volumes and price movements.

In other words, when tools are downed, property values tend to follow suit.

According to Australian Property Monitors, established home sales dropped significantly between 2010 and 2011 and prices came off the boil by 3.5 per cent as a result.

The flow on effect of this new Aussie attitude towards money is profound and impacts on almost everything including;

  1. State government coffers – reduced stamp duty income means big holes in budgets.
  1. Building material profits – the big retail giants such as Bunnings are managing to survive on their extended retail goods provision, but smaller building suppliers are struggling as people hold off on renovations for the time being.

Mellor confirms, “Anything exposed to new housing or addition and alteration activity will have softened in the last six months.”

The amount spent on additions and alterations for existing homes fell 6.5 per cent in NSW and 2.5 per cent in Victoria over 2011 and BIS Shrapnel expects it will fall again, by 9 per cent in Victoria and just under 1 per cent in NSW in 2012.

”I’ve followed the industry for just over 30 years and I’ve never seen anything like this outside the 1982-83 recession or the 1990-91 recession,” Mellor says. ”Building materials companies are finding the sector very tough.”

  1. Builders & contractors – are being forced to cut their profit margins from the standard 5 per cent to 1 or 2 per cent and in some cases, just breaking even. Others have had to reduce their staff numbers.
  1. Shopping centres and retailers – they are reporting that sales volumes are at levels consistent with unemployment rates around 10 to 11 per cent, even though unemployment is currently somewhere around the 6 per cent mark.

Recently retailer David Jones announced a 20 per cent fall in profits just days after its rival Myer reported a similar result.

Apart from cost of living pressures, many of us are reacting to concerns about the amount of debt we’ve accumulated.

According to the Reserve Bank’s latest Financial Stability Review, the ratio of total debt to disposable income has increased threefold since 1991, to a whopping 150 per cent.

While the RBA says most borrowers are managing to meet their obligations without too much of an issue, a small portion are ”very highly geared”, and many are concerned that there could be a high price to pay for those many years of debt fuelled consumer frenzy.

Essentially everyone, from the banking sector right through to smaller retailers, are being told to prepare for many more years of this new, cautious approach to money management that’s taken hold here in Australia.

At the end of the day, this shift in mentality was bound to occur. We should all be thankful that it hasn’t happened off the back of a major recession or depression here in Australia.

Hopefully we have learnt our collective lesson and this new found, stable approach to finances will flow through to the rest of our overall economic outlook for the future.

And that wouldn’t be such a bad thing for anyone.



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