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By Michael Yardney

We’re still spending up big, but that will slow down next year

After a boom in discretionary spending this year, a recent report from the ANZ Bank expects household consumption to slow in 2023.

Discretionary Spending Has Boomed In 2022

We know that the RBA has been trying to slow down inflation by stifling our spending, but this really hasn't happened yet.

The slowdown has been delayed by the very strong labour market and large savings buffers among households, boosted by COVID-related fiscal and monetary stimulus.

But ANZ believes the increasing cost of household debt and the roll-off of fixed-rate mortgages will be key to the slowdown.

The rapid increase in interest rates will hit household finances.

ANZ expects the RBA to increase the cash rate from its current (October) rate of 2.6% to 3.6% by mid-2023.

This will increase the average share of household income going to interest payments to 11%, which will reduce spare cash and slow discretionary spending considerably.

Interest Payments Will Increase To 11%

High levels of household debt make household finances and spending more sensitive to rate hikes, while large savings buffers weaken the relationship between income and spending.

Adelaide Timbrell, senior economist at ANZ Bank explains...

"Fixed interest rates and savings buffers are delaying spending impacts

In June 2022, 35% of outstanding housing debt was fixed, compared to 20% at the start of 2020, according to RBA data.

This means rate hikes will not have an immediate impact on all households.

But the bulk of fixed-rate debt will expire in 2023, which will lead to sharp increases in interest payments for many households.

Average household savings as a share of income have been elevated since the pandemic.

Almost 40% of loans have two years or more worth of repayments in an offset or redraw account (at August 2022).

Growth in the sum of all offset balances has slowed since mid-2021 but is still above pre-pandemic rates."

RBA modelling shows many households can handle a cash rate of 3.6%, but not all:

In its recent Financial Stability Review the RBA modelled how Aussie households would cope if the official interest rate rose to 3.6%

They found that only 27% of households would need to use 30% or more of their income on mortgage repayments at a cash rate of 3.6%.

Share Of Variable Rate Loans

While an increase in the cash rate from 0.1% to 3.6% may result in 15% of households not having enough income to cover essential spending, for around half of households, the increase would only reduce their spare cash after spending on essentials by 20% or less.

Distribution Of Changes In Spare Cash Flows

Spending has not yet meaningfully slowed

Adelaide Timbrell, senior economist at ANZ Bank explains...

"ANZ-observed spending is solid, with a dip in early October that is only a touch sharper than the usual seasonal slowdown.

The latest ABS retail sales result showed growth of 0.6% m/m in August, which is too high to be purely inflation-driven.

The monthly ABS household spending indicator shows no pullback in aggregate discretionary spending.

The increase in interest payments as a result of rate hikes, combined with inflation of essential goods and services, will put pressure on discretionary spending.

Deteriorating rental affordability, as a result of low vacancy rates, is also a risk for some customer segments.

Very low consumer confidence is not curbing spending on discretionary goods and services.

The strong labour market is supporting consumption by increasing the number of people receiving a wage/salary, but also through very low unemployment expectations. We expect the unemployment rate to be below 4% to the end of 2023.

We expect population growth to accelerate in the next couple of years as inbound migration picks up, which will support total household spending."

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.
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