australian household budgets better than they

Australian Household Budgets Better Than They Look


By Chris Shaw

While housing affordability has been an issue for some time and higher fuel costs and interest rates suggest consumers are finding the going tougher at present, research by CommSec's economics team suggests this may not actually be the case.

The group's research shows while increases in interest rates and living costs are hurting these are being offset by higher wages and six years of tax cuts, to the extent a person on an average wage who took out an average housing loan six years ago would now be several hundred dollars better off after allowing for the increases in living costs.

As chief equities economist Craig James points out, timing has been important as those taking out mortgages in the past two years would indeed be struggling, but those who took the plunge into the housing market three or more years ago are in front despite the numerous increases in rates.

Those in the former category would still be better off if they had managed to secure a higher salary, as a 4% wage rise would have added $138 to monthly net pay and this would have been enough to offset higher mortgage payments and fuel prices this year.

James makes the point while rate hikes and petrol prices are headline events in the media it is the lasting impact on budgets that is of more importance and here changes likes cuts in taxes or a salary increase simply don't attract the same amount of coverage but are of greater relevance to spending habits.

As well, many goods such as electrical products and those related to technology have become significantly cheaper in recent years and this also adds to household bottom lines by increasing purchasing power, with James noting the increase in purchasing power of lower prices for a number of goods over the past few years has far offset price increases on other goods and services.

Putting everything into numbers, James estimates an average wage earner taking out an average home loan in 2002 and buying an average basket of goods and services would now be receiving an additional $1,014 per month thanks to tax cuts and wage increases, while higher interest rates would have added only $299 per month in loan repayments.

Add in price increases and the same basket of goods and services would now cost an additional $287 per month, putting the consumer ahead by almost $428 per month. This means Australian consumers in general are being able to withstand recent rate hikes and this is driving the growth in demand for discretionary goods while spending on food, where prices have risen, has actually fallen as a proportion of the household budget from 15% 20 years ago to around 10% now.


At the same time spending on petrol has also fallen as a portion of household spending to its lowest level of the past 20 years, leaving spending on technological items a larger part of a household's budget than petrol for the first time. The last four years has also seen spending on clothing rise by 29% at the same time as clothes prices themselves have fallen by 7%, offering further evidence in James's view that household budgets are actually not under as much stress as suggested by public perception.

Given this situation James expects consumers to slowly find their way back to shopping centres as they realise they can continue to spend, with electrical retailers in particular seen as the most likely beneficiaries of this trend. This leads James to suggest the consumer discretionary stocks in the market have been sold off on perception rather than reality, leaving stocks such as JB Hi-Fi (JBH) well placed to benefit as the spending tide turns.