Consumer spending survey

How has the global financial crisis affected CHOICE members?
 
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01 .Member survey

Couple budgeting

In brief

  • Many CHOICE members are fearful about the quality of life they’ll be able to afford in retirement. Some are staying in the workforce longer than anticipated and revising their retirement plans.
  • Saving more, spending less and getting value from every purchase are high on the agenda.

It’s been a traumatic time for financial markets and the wider economy, with the world experiencing its deepest and most synchronised recession in 70 years. And while Australia has so far been spared the very worst effects of the global financial crisis, consumers have seen the value of their retirement savings plummet, share portfolios smashed, property prices stagnate and unemployment rise.

Confidence has been shaken, which is having a discernible effect on our everyday lives, with fears about meeting the cost of living in retirement, maintaining employment and keeping up with mortgage repayments front of mind for many people.

In March, CHOICE surveyed more than 2000 magazine and online members to find out how they’re managing the downturn.

Please note: this information was current as of June 2009 but is still a useful guide to today's market..


A return to lost values

A common theme throughout responses was the need to return to old-fashioned values of saving and thrift, and a rejection of what some see as a wasteful, throwaway society that relies too much on credit. However, for many members this isn’t really a change at all, as they were already careful and considered with their money. Some members commented:

  • “I can’t fathom the ‘spend, spend, spend’ ethos.”
  • “My natural instinct is to save for what is becoming a stormy rather than a rainy day.”
  • “I grew up in an era when apart from borrowing to buy a house, one had to save to buy other big-ticket items and was ultimately rewarded with a sense of achievement. This seems to be entirely lacking in today’s culture of instant gratification and consequential debt.”

There’s plenty of confusion and anger over the federal government’s cash handouts too, which many members see as perpetuating the problems of over-consumption and consumerism. Some members said:

  • “Encouragement to spend is stupid when you have less to spend.”
  • “We should be teaching people to be frugal again and to seriously revalue their lifestyle.”
  • “[I am] concerned by all these stimulus packages. I don’t recall this sort of thing during the last recession; people just worked through the tough times and eventually things got better.”

She’ll be right …

Most of CHOICE’s members have lived through recessions in the past. While there’s a lot of concern and uncertainty, many retain a general sense of optimism about the future, believing they’ll weather the global financial storm. “My father taught me that decent shares will recover, which I put a lot of faith in as he survived the 1930s depression,” said one member. Others believe “in the resilience of the Australian economy” and that “people who survive the next two or three years will be fine in the longer term”.

In the coming months we will be addressing some of the issues raised through your comments and feedback.

 
 

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CHOICE members are curtailing unnecessary spending and trying hard to reduce their household expenses.

Of our respondents, 68% have a household budget and the majority are sticking to it mostly, while 54% have actively found ways to reduce their household bills. One big area being targeted is in the weekly shop, with more than half trying harder to reduce their grocery bill compared with the same time last year, and 22% switching to a cheaper supermarket.

There’s been a shift to generic brands since the downturn started: 85% of respondents buy generic products and 25% reported increasing their spend on those items. This is consistent with trends across the economy, as the media reports shoppers are ditching expensive brands, seeking “more for less” and expecting value for money on all purchases.

Members are also looking for ways to cut the cost of non-essentials. International travel, clothes and entertainment top the list of discretionary items being targeted, with more than 40% of respondents cutting expenditure in those areas.

Where you won’t compromise

Thirty-four percent of survey respondents have postponed the purchase of a big-ticket item, such as a TV or fridge, for economic reasons. But 92% will not compromise on the quality of household appliances to save money. Even in a recession, CHOICE members place very high importance on quality as well as price.

Another area where people are reluctant to make changes to save money is on their children’s education – 26% of respondents have children in school, and while we don’t know the ratio of public to private schools, the vast majority have not changed schools to reduce fees, nor do they intend to.

Interestingly, the attitude to childcare is very different. Of the fairly small number of respondents who use childcare, 28% have made a conscious effort to reduce their childcare fees (that’s 4% of all survey respondents). We can only speculate on how they’re making these savings; changing to a cheaper centre or reducing the number of days (whether by choice or having no other option) are likely to be the most common ways to reduce such costs.

Job security

The prospect of losing a job is most people’s biggest fear in a recession and unemployment is on the rise, hitting 5.7% nationally in May – the highest rate since February 2004 and an increase of 1.8 percentage points in 15 months. There’s widespread belief among economists and forecasters that job losses will significantly increase in the next two years. A March 2009 report by Sensis found that unemployment was the single biggest concern for worried consumers.

So how are CHOICE members faring? One of the most interesting findings of our survey is the relatively strong feeling of job security among the majority of CHOICE members – 41% of respondents are “very confident” about their job security, while 45% are “quite confident”.

Job confidence has been increasing in the general population too, after hitting historic lows. The February 2009 Westpac/Melbourne Institute Consumer Sentiment Survey, which measures consumers’ feelings of job security, showed a deterioration of 59% over the previous year and the highest level of job insecurity since the survey began in 1974. However, the general confidence level dramatically increased in March and April.

Four percent of our respondents report having lost their job within the past year, while 7% said that fate had been suffered by someone in their household. Of those in paid employment, 14% report being “not very” or “not at all confident” in the security of their job. Many people are putting in more time and effort at the workplace, with 25% of respondents working longer hours than before for the same amount of pay. One member believes “we should all work harder and be more conscious about the value of honesty, even towards our employer – so no sick leave for [our] own purposes or taking things home that we shouldn’t!”

Five percent of respondents have been forced to manage with lower earnings, as their employer has reduced their working hours through measures such as a four-day working week. Again, some people support such moves. “I would like everybody to take a reduction in work hours to keep other people employed if needed,” said one member.

As a result of changes to the economic climate, a large number of respondents are saving more, directing money into deposit accounts, investments, super contributions and so on, as well as paying down more debt. And when it comes to credit cards, CHOICE members are savvy, with 80% paying off their card in full every month to avoid interest and late payment fees and 27% of cardholders reducing their debt compared with this time last year.

Almost all respondents drive and more than a third shopped around for cheaper car insurance in the past year. More than a quarter (28%) of all respondents also shopped around for home insurance and 18% for health cover.

Despite the downturn, 54% of respondents said they’re in a financial position to invest money. Their preferred destinations for excess funds were fairly evenly divided between bank deposits, shares and property.

Managing the mortgage

When we reported on strategies to combat Mortgage stress, the standard variable interest rate was 9.4%, following 12 successive rate rises since 2002. How times have changed! While mortgage stress remains a major concern, it’s for different reasons: central bank interest rates have come down 4.25% in the past year, with most of that being passed on to mortgage holders, but unemployment is rising, heightening the financial pressure on those affected.

Nearly half of all respondents have a mortgage, and 12% of mortgage holders consider themselves to be in mortgage stress, with a small number (2%) having been forced to sell their property due to the downturn. Although the term “mortgage stress” is subjective, a traditional and still widely used way to gauge stress levels is to look at whether a household is paying more than 30% of its income on housing costs (the established benchmark).

If you’re on a low income and paying one-third of it on home loan repayments, there won’t be much left over for your cost of living. However, if you have a moderate or high income, paying a third towards your mortgage may still leave you with plenty to live on (provided your source of income continues). That’s why the 30/40 rule is now the preferred measure of stress – restricting the 30% stress test to the 40% of lowest income households.

Of the respondents who have a mortgage, 39% pay more than one-third of their household income on mortgage repayments, and 57% of those with a mortgage (or 27% of all respondents) are taking advantage of the drop in interest rates to pay off their loan sooner.

For some people, the recession has actually made mortgage management a little easier. Said some members:

  • “The current economic climate has not had any real impact on me except it has allowed me to pay a substantial extra sum off my mortgage.”
  • “It sounds awful but the current economic conditions are helping us; we have good job security and as home prices and interest rates are down we have purchased an investment property. The combined repayments on our two mortgages now are not much higher than the single one was a few years ago with the higher rates.”

Most households have experienced a large reduction in wealth over the past year. The stock market crash is largely to blame, with individual investors’ share portfolios, managed funds and superannuation accounts plummeting as a result. That other great avenue for our capital, residential property, has also reduced in value in some areas since the economic downturn hit.

Sixty-four percent of respondents reported a decline in the value of their overall assets since the same time last year, while 18% reported their overall wealth has stayed about the same. In 15% of cases, the value of household assets actually increased.

Not surprisingly, superannuation losses are leaving many members fearful about their future. While 57% of respondents believe they’re on track for a comfortable retirement, almost a third do not, and 12% don’t know or haven’t thought about it – including four out of 10 respondents under 35 years of age.

As you’d expect, confidence about the future was related to the level of household income; 50% of respondents with an annual income under $35,000 don’t believe they’re on track for a comfortable retirement, but the figure drops to just 19% for respondents with more than $150,000. Age was also a factor, with the general trend being that confidence about a comfortable retirement increases as respondents got older. Nearly three-quarters of those aged 66 and older – many of whom may already have finished working – believe they’re on track for a comfortable retirement.

What members say about the future

Thirty-one percent of survey respondents believe they’re not on track for a comfortable retirement, with many blaming sharemarket declines.

  • Our self-managed superannuation fund – all in blue-chip stuff – has decreased in value by so much I can probably never retire in comfort and maintain an ordinary lifestyle. My wife and I earn slightly more than the sum that would enable me to get a part pension, and I can’t get a pension until she is 65 anyway. So much for being a taxpayer for over 50 years!”
  • “As a retired couple, we will need to devise ways to overcome lost super. However, we expect financial recovery will [take a long time], as the unemployment problem is yet to impact fully.”
  • “My self-funded pension is losing value and living costs are rising. The combined effect does not augur well for my financial future. I would have to liquidate assets or apply for a government part-pension to maintain my present lifestyle.”
  • “If the stock market recovers within two years our retirement position will be reasonable. Any longer is of considerable concern.”
  • “I retired last year and put my money into term deposits in a pension account, which I feel is keeping my money secure until the economy picks up. I was fortunate that my superannuation had not lost any money in the 12 months before I retired. I was adamant I could not afford to lose any after I retired; hence the term deposits.”
  • “I have had a steady career for the last 30 years and am due to retire next year. With a considerable mortgage debt and son in high school I do worry about my financial future and how I will manage during my retirement. I also have concern for the next generation and how they will cope in the current and future economic climate.”
  • “I am on a superannuation pension from a fund that is less than half the value it was a year ago. This means it will run out much earlier than it was designed to do two years ago, and I will then have to exist on a full Centrelink age pension.”
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