Australia | Mar 21 2012
– Oz families struggling to manage debt levels
– Increased use of credit cards a concern
– Credit histories likely to be impacted by such decisions
– Homebuyer confidence index rises
– Mortgage stress falling, affordability improving
By Chris Shaw
The latest Consumer Credit Expectations survey from Dun and Bradstreet shows families and low income earnings in Australia are increasingly struggling to meet their financial obligations. The survey suggests 41% of Australian households with children will need to rely on a credit card to cover living expenses. This is an increase of 200 basis points (2.0 percentage points) from late last year.
The survey of June quarter savings levels, credit usage, spending and debt performance expectations, showed more than one-third of Australian families will find it tough to manage existing debt levels. As well, almost half of all low income households are likely to experience difficulty in managing debt, which is up eight percentage points from the final quarter of last year.
Dun and Bradstreet CEP, Gareth Jones, suggests the survey highlights a worrying cycle of higher debt accumulation and dependency among consumers. Jones points out the least solvent of Australian consumers are accumulating unmanageable debt levels, while those best able to afford to meet credit commitments are simply not spending.
The survey indicates a growing number of households (41%) earning less than $50,000 per year expect to use credit to cover costs, while despite the growing financial strain more than a quarter of families intend to apply for a new credit card or a limit increase in the June quarter.
Among families short of cash, the survey suggests 12% would default on a mortgage payment or internet bill, while 14% of families would choose to default on a pay-TV account. Nearly 20% of low income families would sacrifice an electricity bill.
Jones notes an increasing number of young Australians also plan to default on a mortgage payment if short of cash, with significant increases in this number in Western Australia and Victoria. At the same time more consumers plan to use redraw facilities on a mortgage to make a major purchase, a 4% increase in year-on-year terms to 22%.
The problem in Jones's view is while phone or internet bills are viewed as dispensable, defaulting on such an account can still damage an individual's credit history. A default stays on a credit report for five years, potentially limiting a consumer's ability to to access affordable credit in the future.
Overall, the survey showed the proportion of consumers with a personal loan rose five percentage points to 24% since last year, with more consumers expecting to use a personal loan to pay for a major purchase in coming months. This is up from 16% in the final quarter of last year.
Age plays a big role in consumers' approach to credit, as the survey showed 43% of Australians aged 18-34 would use a credit card to pay for otherwise unaffordable expenses in the coming quarter, compared to 33% of 50-64 year olds.
Area also plays a part, as the survey showed 43% of New South Wales residents will use a credit card to cover expenses in the coming quarter, followed by Queensland residents at 39%. Almost one-third of Victorian consumers plan to make a major purchase in the coming quarter, while only 23% of Western Australian consumers expect to do the same.
The Dun and Bradstreet survey is something of a contrast to the latest edition of the Genworth Homebuyer Confidence Index, which showed 39% of homebuyers see now as a good time to purchase a home. Homebuyer confidence rose 2% and is now back to levels of last March.
According to Ellie Comerford, president and CEO of Genworth, the cuts to the cash rate by the Reserve Bank of Australia (RBA) over the past year have made a significant impact on borrower sentiment and have decreased mortgage stress.
The survey shows as of March this year only 22% of households experienced mortgage stress over the past 12 months, down from 25% last September. In total, mortgage stress caused by interest rates has fallen from 50% last September to 32% in March.
The survey showed house prices are now seen as less of a hurdle for first home buyers than any other factor, as in March only 7% of respondents said the area they wanted to buy in was too expensive. This is well down from the 21% recorded last September.
Comerford notes while cost of living increases and unemployment continue to strain households, these factors are currently being offset by wage growth, low inflation and lower interest rates. This is improving affordability and as a result borrower sentiment.
The survey showed the proportion of first home buyers who were unable to save for a deposit has fallen from 45% last September to 30% in March, while 84% of first home buyers didn't anticipate having any difficulty meeting mortgage repayments in the coming year. This compares to 78% of average homebuyers. The proportion of first home buyers who thought they would be unable to afford repayments also fell, to 19% in march from 38% last September.
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