Household finances hit ‘10-year low’

Household finances have hit their lowest level in a decade as consumers increase their precautionary savings, according to a new report by the Melbourne Institute.

The Melbourne Institute Household Financial Conditions Index fell 24.3% in June to 25.2 points – the lowest level since the survey began in 2001.

The index shows the proportion of households which are saving, relative to the proportion of households which are running into debt or drawing on their savings.

Edda Claus, a research fellow at the Melbourne Institute, says she’s surprised by the result.

“This record low comes as a surprise as house price rises have been moderating and the unemployment rate is below 5%,” Dr Claus says.

But according to the survey, the high Australian dollar, coupled with economic uncertainty, has promoted consumers to increase their precautionary spending.

The research reveals the most popular reason to save is for a holiday, with 58.7% specifying it as their key reason.

The result is in line with latest research from Bankwest, which reveals most Australians plan to spend their tax return on holidays in a bid to take advantage of the high dollar.

According to the Melbourne Institute, the second most popular reason for saving is “for a rainy day or a precaution”, rising to 55.4%. It is the highest result since respondents started nominating their motivation for savings in May 2005. Repaying debt and paying bills was the third most popular reason for saving.

The findings back up a recent report by CommSec chief economist Craig James, which highlights a major shift in recent consumer trends.

“Today’s consumer is more likely to spend cautiously, put purchases on EFTPOS rather than the credit card [and] more inclined to put money in the bank,” James told StartupSmart.

“The bottom line is that retailers and other consumer-focused businesses can’t take Aussie consumers for granted.”

Bankwest senior analyst Tim Crawford says for those businesses looking to lure new customers, it’s all about value.

“People spending are looking for value, so businesses…need to convince consumers they’re getting a good deal,” he says.