In 2013, Credit Suisse presented some interesting research regarding the issue of household sector savings. While the commonly cited net saving ratio indicates the proportion of income the household sector collectively saves, Credit Suisse noted the measure of savings also includes superannuation payments.
The issue is that compulsory superannuation contributions are locked away until retirement. It therefore cannot be counted as savings immediately available to households for purposes of consumption and/or repayment of debt as cash or on-call deposits may.
Calculated as a residual item in the national accounts, net saving is the ratio of household net saving to household net disposable income. The former is equal to household net disposable income minus household final consumption expenditure, with the latter equal to household gross disposable income after deduction of consumption of fixed capital.
The net saving ratio exhibits a long-term decline from the mid-1970s through to the mid-2000s, often turning negative during the latter period, before rebounding during the GFC. A number of factors have played a part it this decline, such as the ageing population, mining investment and commodities boom, behavioural changes prompted by the GFC and interest rates (RBA 2016). Financial deregulation, beginning in 1979, has allowed for the rapid accumulation of mortgage debt and to a lesser extent, personal debt, by the household sector as argued by the RBA (2016: 42):
Structural changes to the Australian financial system have been important longer-term drivers of changes in household saving behaviour. Financial deregulation in the 1980s and a structural shift to low inflation and low interest rates in the 1990s allowed households that were previously credit constrained to accumulate higher levels of debt for a given level of income. This rise in indebtedness was accompanied by strong growth in housing prices and a reduction in the household saving ratio to unusually low levels. In this way households were able to support consumption via the withdrawal of housing equity. Innovation in financial products – such as credit cards and home-equity loans – also gave households much better access to finance. The adjustment to these structural changes in the financial system appears to have largely run its course by the mid 2000s.
Analysis of the patterns in consumption, income and savings between 2003/04 and 2009/10 demonstrates the net saving ratio is found to increase with income but savings decrease with wealth and leverage. Households with less secure income provided the largest contribution to the change in the savings ratio while those with wealth did so to a lesser extent (Finlay and Price 2014). Policymakers may claim the rebound in the ratio since the late 2000s is a positive sign, allowing for greater discretionary consumption in the future and providing a safety buffer for debt payments by households.
Analysis by Credit Suisse estimates that in 2013, the net saving ratio falls to around 1 to 2 per cent when superannuation is excluded and declines further to -3.6 per cent when extra principal payments are excluded (Spicer 2013). During the 2000s, this adjusted saving ratio fell to around -15 per cent.
An updated time series illustrating the trends in the net saving ratio by subtracting estimated superannuation payments is shown below. The latter series declined below zero throughout the 1990s and persisted with this trend until the economic shock generated by the GFC prompted the household sector to save more. Finlay and Price (2014: 25) conclude “that precautionary saving motives, a more prudent attitude towards debt and an effort to rebuild wealth after the financial crisis contributed to the rise in the household saving ratio, although other interpretations of the data are possible.”
The ratio was marginally positive over the next half a decade, indicating the household sector was accumulating savings outside of superannuation. This dissipated during the last two years as the ratio has once again turned negative as households began another cycle of mortgage debt leverage beginning in 2013.
Interestingly, the adjusted savings ratio has tended to decline and turn negative as the mortgage debt to GDP and household income ratios have risen. This was the case between 1988 and 2008, with the mortgage debt ratios steadying between 2008 and 2013 as housing prices temporarily dipped twice; one during the GFC and again at the peak of the mining investment boom in 2011/12.
As the mortgage debt ratios have risen from 2013 onward, the adjusted net saving ratio has declined and has once again turned negative. This suggests a link between debt accumulation and savings: as households become more indebted by taking mortgages (and hence debt payments) up at a rate faster than household income, savings decline as a result (Freestone et al. 2011).
At the state level, the most concerning of all is Victoria. The net saving ratio turned negative in 1998 and has persisted except for a solitary year (2009). This demonstrates the household sector in Victoria has persistently dis-saved for almost two decades. The adjusted net saving ratio implies even less savings.
The result is not surprising, however, given the lacklustre growth in household sector income and the gargantuan escalation in household debts to speculate on housing prices. It is estimated the VIC household debt to GSP ratio (compatible with the BIS methodology) is 130% as of 2016Q4.
While the official ABS net saving ratio has declined over the last few decades and the adjusted net saving ratio demonstrates it has often shifted into negative territory, it says little about the actual level of individual Australian household savings. It is worth examining the results from the surveys conducted in recent years to ascertain a reasonably reliable picture of how much Australians save, what proportion do save, and the median or mean level of savings.
The results from surveys such as the ME Bank Household Financial Comfort Report and the Bankwest Curtin Economics Centre, including the occasional bank public relations releases indicate just how little cash savings Australians do have. This replicates findings in Canada and US which demonstrate large proportions of households have little to no savings.
Bankwest Curtin Economics Centre. (2015). “Beyond our Means? Household Savings and Debt in Australia”, Focus on the States Report Series, No. 2, Bankwest Curtin Economics Centre, Western Australia.
Finlay, Richard and Fiona Price. (2014). “Household Saving in Australia”, Research Discussion Paper, Reserve Bank of Australia, Sydney.
Freestone, Owen, Daniel Gaudry, Anthony Obeyesekere and Matthew Sedgwick. (2011). “The rise in household saving and its implications for the Australian economy”, Treasury Economic Roundup, Issue 2, Treasury, Canberra.
ME Bank. (2017). “ME Household Financial Comfort Report: 11th Edition”, ME Bank, Melbourne.
RBA. (2016). “Statement on Monetary Policy”, February, Reserve Bank of Australia, Sydney.
Spicer, Kirstie. (2013). “The high savings rate is an illusion”, Business Spectator, 8th November.