On the whole it seems Australians are feeling insecure about their finances. Is this the catalyst for or as a result of the slow housing and finance market? Is the doom and gloom all in our minds or are Australians in real trouble which could lead to a debt crisis and the accumulation of bad credit history by some sectors of the population?

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

Yesterday Business Day reported on a worldwide survey showing Australian consumer confidence was significantly reduced despite the strength in the Australian economy in comparison to other countries.

The article, titled We’re Saving For a Gloomy Day addresses Australia’s growing pessimism as featured in a survey brought out by Boston Consulting Group. The survey suggests the savings habits of Australians born in the midst of the global financial crisis are here to stay.

“In its 11th annual consumer sentiment survey conducted last month with 15,000 consumers in 16 countries, BCG asked respondents a series of questions around financial and job security, spending plans and savings habits. The results showed Australian shoppers were among the most worried and financially insecure in the developed world, and planned further cuts in discretionary spending,” the article says.

This sentiment is not surprising, considering the key finding from the survey shows that not only are Australians cautions, but that the rates of consumers who feel they are in financial trouble has soared:

“47 per cent of Australian consumers felt they were in financial trouble or not financially secure, up from 36 per cent in 2011. This heightened sense of panic compares with 48 per cent in the US (where the unemployment rate is double Australia’s), 43 per cent across the European Union, 41 per cent in Spain (unemployment close to 25 per cent) and 45 per cent in recessionary UK,” the article says.

Here are the results from the survey country by country courtesy of Business Day:

So what is causing this fear? Perhaps the drop in house prices (on average 4.5% over the past 12 months according to the Australian Bureau of Statistics) could be having a significant impact. Perhaps a reduction in the level of household equity has meant many are reluctant to increase spending as there is no longer a buffer in their biggest asset – the family home.

This was the viewpoint of the leader of BCG’s consumer practice in Australian and New Zealand, James Goth.

Mr Goth said a downturn in the housing market was affecting spending plans in Australia and feeding the pessimistic outlook.

”Another reason why I think we are so bearish in our discretionary spending outlook, regardless of how well the economy is doing and how good unemployment rates are, is the breaking of the house-price cycle – people can no longer fund these very high expenditure rates based on ever-increasing house prices, he told Business Day.”

So what could be the long term prospects for the housing market and lending finance numbers?

This week’s March housing finance statistics reported by the Australian Bureau of Statistics show a 0.3% rise in home loans to owner occupiers, but the proportion of first home buyers fell to 16.4 per cent. In all, the total value of dwelling finance commitments fell 0.5 per cent in March compared with February in seasonally adjusted terms.


March 2012 compared with February 2012:

 The trend estimate for the total value of dwelling finance commitments excluding alterations and additions fell 0.2%. Owner occupied housing commitments fell 0.5%, while investment housing commitments rose 0.4%.
 In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions fell 0.5%.

March 2012 compared with February 2012:

 In trend terms, the number of commitments for owner occupied housing finance fell 0.4%.
 In trend terms, the number of commitments for the purchase of new dwellings fell 1.3% and the number of commitments for the purchase of established dwellings fell 0.6%, while the number of commitments for the construction of dwellings rose 1.1%.
 In seasonally adjusted terms, the number of commitments for owner occupied housing finance rose 0.3%.
 In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 16.4% in March 2012 from 17.2% in February 2012.

The minutes of the Reserve Bank of Australia May board meeting were released on Tuesday and noted that weakness in non-mining sectors was persistent and was predicted to continue.

The Sydney Morning Herald reported in its article Slowing Growth, rate rises tipped RBA’s hand that among other economic factors, slowing credit growth and demand for housing finance were involved in its decision to cut interest rates this month.

“Demand for housing finance had eased in the past few months and recent data suggested that dwelling prices had continued to decline, although there were tentative signs that the pace of decline had been more gradual in recent months,” the RBA minutes said as reported in SMH.

“Credit growth for households had been marginally lower over the past year than over the previous year, and business credit was rising only at a very modest rate,” the minutes said.

Do the facts show Australians are really experiencing financial difficulty?

The sentiment was echoed by Dun and Bradstreet’s Credit Expectations Survey released on April 30, 2012. It pinpointed in its survey of June quarter savings, credit usage, spending and debt performance expectations that many who can meet credit commitments are choosing not to, but that there is a significant portion of people struggling with their current debt levels.

It showed over a third of Australian families will struggle to manage existing debt levels. It also found nearly half (46%) of all low-income households expect difficulty managing their debt. This represents a rise of eight percentage points since the fourth quarter of 2011, 11 points above the national average.

According to Dun & Bradstreet CEO, Gareth Jones, the survey results indicate a worrying cycle of debt accumulation and dependency among struggling consumers.

“Unfortunately, we are seeing the least-solvent consumers accumulating unmanageable levels of debt, while those best able to meet credit commitments are avoiding spending altogether,” Mr Jones said.

“Nearly one-in-three low-income households expect rising household debt levels, but with limited ability to pay this down. When consumers are increasingly forced to accumulate debt they are unable to manage, just to keep the family finances afloat, this has the potential to quickly become a vicious cycle,” Mr Jones said.

Should this cycle continue, and a portion of people continue to accumulate unmanageable debt levels, the result will be a possible increase in the number of credit file defaults – with the only saving being – well – savings.

The level of savings reported in the country is heartening – we have learnt from other countries post GFC, and the smart savings of many, whilst it may hurt the retail sector – would buffer many families from a credit debt crisis like we have seen in countries like the United States. But as often happens, for those with a high proportion of debt who don’t have the luxury of saving – they may be thrown into the debt cycle– robbing Peter to pay Paul just to stay afloat.

For those who accumulate a bad credit history, the prospect of recovery would be slow. For between 5 and 7 years they will be refused mainstream credit and be on the outer – any credit they are approved for would generally be at a higher interest rate, meaning they are going to struggle even further to pay back their debts. The consequence of possible defaults on new loans could mean they are trapped in this cycle for a very long time.

In this sense, for those who are living with credit file defaults which they believe shouldn’t be there, it would save them thousands by addressing the problem and having those credit rating errors addressed and potentially removed. As a safeguard for the future should lending criteria tighten even further, any inconsistencies on a person’s credit report should be addressed now – before it is urgent. People can contact a credit rating repairer to help with building a case to have those credit listings placed in error on their credit file removed – as their right and responsibility.

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