Which households are feeling the most financial stress?

As interest rates and the cost of living have soared, so have worries about financial stress for many households. The country’s biggest banks have in the past fortnight acknowledged more of their customers are feeling the pinch, and these pressures are expected to worsen as the latest interest rate rise is passed through.

But financial stress is a broad term, with varying degrees of severity. It can include everything from people worrying about money and needing to make cuts to their spending, to households struggling to pay bills, to the most extreme cases where people become insolvent.

So, what are the economic indicators telling us about financial stress in the community? And which groups are likely to be feeling it the most?

Recent entrants to the property market may have had less time to build up buffers, leaving them at higher risk of financial stress.Credit: Peter Rae

Data from banks shows the vast majority of households are paying back their loans on time, but measures of stress based on household sentiment show people are getting more worried.

Recent survey data from Roy Morgan said 30.3 per cent of all home loan borrowers, or 1.57 million people, were at risk of “mortgage stress.” That alarming figure categorised households as “at risk” if they were spending more than a certain proportion of their income on home loan repayments, depending on their income and spending.

The Reserve Bank recently said that although there were few signs of a rise in severe financial stress among households, Google searches on the topic had increased, and surveys that ask people about their financial situation have fallen to pandemic-era lows.

Banks, meanwhile, typically assess stress by looking at the number of customers who have missed a loan repayment or sought hardship assistance - such as moving onto interest-only repayments, or restructuring their debt.

Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank have all reported their results in the last fortnight, and across the industry there has been a modest rise in missed repayments, or arrears. But overall, they say arrears are low by historical standards.

Credit ratings agency Standard & Poor’s says the proportion of customers who are 30 days or more behind on their home loan payments has been fairly flat for the last few months and was 0.94 per cent in September.

S&P Global Ratings structured finance director Erin Kitson said arrears were still low, hovering around long-term averages, but that some households were feeling the pinch.

So, who is most likely to be struggling with their mortgage?

Kitson said it is often those who are more leveraged, such as people who have taken out bigger loans compared to their income. “They’re more exposed to interest rate increases and what that does for mortgage repayments,” she said.

He added that recent homebuyers who haven’t had the time to build up savings buffers and who are more highly leveraged, were also probably feeling the mortgage stress more than someone who had paid down more of their home loan.

Moody’s, another ratings agency, said in a September report that mortgage delinquency rates were gradually rising across the country, but were more pronounced in regions where the typical household income was in the bottom third of the state.

“These regions are also typically outside metropolitan areas. Mortgage borrowers in these areas are bearing the brunt of high interest rates and inflation,” Moody’s said.

Aside from people who were falling behind on their mortgages, several bank bosses have emphasised renters were often struggling more than homeowners.

ANZ chief executive Shayne Elliott says homeowners are by and large rich.Credit: Pat Scala

ANZ Bank chief executive Shayne Elliott said the people in the most dire financial situations were often part of several key demographics. “They’re generally renters, they’re younger, they’re in less secure employment,” he said. “I know that sounds simplistic, but they are the people cutting back as hard as they can.”

NAB chief executive Ross McEwan said while households were generally resilient, lower-income people were being disproportionately impacted by inflation. “Every cost has gone up on them,” he said. “Inflation has hit their weekly food bill, their petrol bill, their power bill, and they have less flexibility in their budget because they’re on a lower income,” McEwan said.

Westpac chief executive Peter King also said that while higher-income customers were in many cases able to manage higher interest rates, renters were feeling the bulk of the stress. “I think where the challenge is popping out of the economy is actually among renters,” he said. “If you look at owner-occupiers, they’re going okay, but renters are often people that are lower income.”

Despite the growing signs of financial stress in parts of the community, economists and banks have been surprised at the resilience of households overall. Key reasons for this are the low level of unemployment – which edged up to 3.7 per cent this week – and the hefty savings balances that many people built up during COVID-19.

As well, surveys and data from businesses such as banks and supermarkets suggest consumers are cutting back spending to get their budgets in order. CBA this week said it had seen a decline in spending on food and beverages, hospitality, household goods and recreation last month – whereas spending on essentials rose, including in transport, utilities and health.

ANZ’s Elliott also said the bank’s credit card and debit card data showed people who were feeling the squeeze were delaying purchases and changing their spending habits, as inflation pressures remained stubborn.

“They’re not eating red meat, or not eating meat at all, they’re buying white-labelled products, they’re deferring purchases on everything they can,” he said.

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