Personal insolvency statistics recently released revealed that there was a 5.6% increase in personal insolvency levels between the period 30 June 2017 to 30 June 2018. Whilst this increase may be swatted away as nothing to worry about by some, to me it is indicative of a general change and a signal of potentially challenging times ahead for many individuals and/or families.
Notwithstanding that some of the headline economic statistics for Australia remain solid, i.e. modest levels of GDP and low levels of unemployment, there is no doubt that many individuals and families are now starting to feel the on-going impacts of:
- An inability to secure all the work that they would like to have. In other words, when we understand how the unemployment statistics are calculated, it certainly seems to be the case that while many people are able to get part-time work, they either are unable to get enough hours or a full-time role. In simple terms, many individuals want more hours, but cannot get them.
- A lack of wage growth: There are many reasons for this and this article will not explore them, but there has been no decent effort by any Federal Government to look at improving productivity levels since the 1980's.
- Increasing living costs: Energy and petrol costs, private health insurance and general living costs are all taking more disposable income in recent years against a backdrop of points 1 and 2 above.
- Interest/Mortgage Rates: Whilst still at record lows in Australia, but seemingly taking a bigger share of disposable income courtesy of the broader property market increases, particularly in the east coast states over the past five (5) years. One can only wonder what the true fallout will be as the interest rate cycle turns (note: the banks will continue to move outside of the RBA given how they are funded - the pace is likely to pick up in 2019.)
Notably, in a recent survey undertaken by ME Bank on Household Financial Comfort, the Report found that a quarter (25%) of Australian households reported that they had less that $1,000 saved in the bank. And nearly 45% of households were in mortgage stress, being defined as spending more than 30% of their income on their mortgage.
This Report by ME I believe shows that individuals and families are using more of their savings and available income on living expenses.
Where does all of this lead to?
A reminder of a few pertinent statistics are relevant.
- Generally, the proportional breakdown of personal insolvency statistics between males (57%) and females (43%) remains relatively stable.
- The most common age bracket for those entering some form of personal insolvency is 35-49 years of age. This age bracket represents 40% of all bankruptcies.
- Of the bankruptcies that occur in Australia annually, approximately 80% are non-business related. Of the 80% of bankruptcies:
- 35% relate to excessive use of credit;
- 31% relate to unemployment / loss of income;
- 20% relate to relationship breakdown or ill health.
My view is that many individuals and families are at a tipping point where changes such as job loss or fewer hours, even modest increases in interest rates, or a macro economic shock will hurt a lot of households. In addition, with the strong gains in the residential property market behind us and with tighter lending conditions, households no longer have the easy luxury of refinancing and extending facilities to help ease the cost of living burden.
It is when considering the above points that I believe there will be an increasing reliance on credit to fund living expenses and over the next few years I expect that to play through in the form of increasing levels of personal insolvency i.e. bankruptcies. One key thing to watch I believe is the level of new car sales is an interesting barometer to follow regarding broader consumer confidence.
But the message is threefold:
- Whilst many may have benefited from the recent economic conditions, there are others that have not;
- With living costs showing no sign of getting easier, reliance on credit is likely to reign as other opportunities via which living expenses were funded no longer readily exist; and
- Individuals and families as much as possible need to cut their cloth according to their budget - i.e. think about how much Netflix, Foxtel and other apparent necessities cost each month!!