Why household debt is the scariest thing in Australia right now

Why household debt is the scariest thing in Australia right now

A NEW study has revealed how much Australians really need to earn in order to enjoy a healthy standard of living.

University of NSW researchers calculated a new basic budget that allows for a healthy level of social participation and to reflect real needs, rather than whether people were living below the poverty line, which is set at 50 per cent of median income.

Researchers considered how much people paid on housing, food, medication, household goods and services, transport as well as lifestyle expenses, exercise and social activities.

The report New Minimum Income for Healthy Living Budget Standards for Low-Paid and Unemployed Australians included consideration of how often (or whether) households ate out, had friends over for a meal and took a family holiday each year.

While those factors considered necessary for healthy living were included, the report suggests there was no allowance for even the most modest or occasional “luxuries” and the budgets were extremely “tight”.

Most items in the budgets (food, clothing and footwear, and household goods and services) were identified and priced in leading retail stores like Woolworths and Kmart.

It calculated that a single adult would require almost $600 a week to have a reasonable standard of living, while a couple with two children would need to spend $1173.

The report found Australians living on unemployment benefits were not receiving enough money to cover this basic standard. Many earning minimum wages were also not meeting the standard.

For example a couple with two children would need $1173, but would only be getting $814 a week if they were unemployed, and $1048 if there were on low wages.

Chief investigator Professor Peter Saunders, a global expert on social policy from UNSW’s Social Policy Research Centre, said the findings suggested a change was needed in how Newstart levels were determined.

“The quality of people’s lives cannot be completely represented by the goods they consume and it is important to ensure that the budgets also allow for a degree of social participation that is consistent with healthy living and social inclusion,” he said.

Housing was identified as the largest single cost to family budgets, followed by food, household goods and services and transport.

The UNSW Social Policy Research Centre compiled the report, with support from Catholic Social Services Australia (CSSA), the Australian Council of Social Service (ACOSS) and United Voice.

Meanwhile, another expert has warned that a potential downturn in consumer spending could be more dangerous to the economy than the property bubble.

University of NSW economist Richard Holden believes a drop in spending would be a more immediate concern as it would impact on business investment and expansion, and this would have a “multiplier effect”.

“They’re not going to be in the mood to give big pay rises or wage rises at all. They’re not going to be employing people and so that then compounds on the consumer side,” Dr Holden told The New Daily. “It just goes round in a vicious circle.”

Australian households are already feeling the pinch, with more than half believing they have fallen behind the cost of living in the past two years, an Essential Research poll released this month showed.

Wages growth is at its lowest in at least two decades, at about 1.9 per cent, according to the Australian Bureau of Statistics Wage Price Index.

About 40 per cent of 1032 respondents to the Essential poll said that while they have enough for basic essentials they could not save money.

Just 19 per cent of those earning over $2000 each week said they could save a lot of money.

More than half said they were paying a lot more for their electricity and gas, followed by insurance (31 per cent), medical and dental (30 per cent) and fresh food (29 per cent).

The most ANZ-Roy Morgan rating found Australian consumer confidence is now close to its lowest on record after falling for the third straight week to 109.2. It fell 2.2 per cent for the week ending August 20, down from a high of 118.4 just three weeks earlier and below the long-term trend average of 112.9.

ANZ head of Australian economics David Plank said that after a period of recovery, consumer sentiment had been trending lower in recent weeks - most likely because of the war of words between the United States and North Korea.

On Monday, Four Corners highlighted the huge amount of debt that Australians were carrying, partly due to inflated property prices, and which was also contributing to mortgage stress.

The show featured one young Sydney couple who had racked up more than $1 million in debt to buy seven properties in just two years, while on a combined income of $135,000.

Australia has a household-debt-to-income ratio of 190 per cent and financial data analyst Martin North told ABC he had never before seen the “perfect storm” of issues that has put the Australian housing market, and wider economy, in such a precarious situation.

“We’ve got a very high household debt. We’ve got very high house prices. We’ve got households in some degree of difficulty already,” he said.

At the moment one in four mortgaged households (820,000) are in stress, meaning they do not have enough income to cover their repayments and living expenses.

This would jump to one in three households if interest rates rose by 0.5 per cent, according to Mr North’s modelling.

“You only need a small consequential change, a small increase in the cost of fuel and stuff, to be able to actually really create that pain point,” Mr North said.

“I cannot think of a single economy that’s had a downturn with that much debt that it’s not been a deep downturn.”

charis.chang@news.com.au | @charischang2

