Saturday, February 19, 2011
It has drawn remarkably little comment, but the household saving ratio - saving as a proportion of household disposable (that is, after-tax) income - is the highest it has been in more than 20 years.
You wonder why the retailers are doing it so tough? That's why. With wage rates increasing and more people in jobs, household income has been growing quite strongly. But in recent years we've been much less inclined to rush out and spend every cent that comes our way.
That's what saving is: the bit that's left over when you don't spend all your income on consumption. In fact, economists define saving as ''deferred consumption''.
Most of us think of saving as putting money in bank accounts. We've been doing more of that lately, but it's not the main way we save. Historically, the main way Australians have saved is by borrowing a shed-load of money to buy a house, then paying it off over the next 25 years. Your savings are embodied in the proportion of the house that's owned by you rather than the bank - your ''equity'' in the house.
The household saving ratio was at 15 per cent in the early 1980s, but then it fell for more than two decades to reach a low point of minus 2 per cent in the early noughties. We were ''dissaving'' - consuming more than we earnt.
How's that possible? By running down past savings or by borrowing.
Since the mid-noughties, however, the saving ratio has shot up to 10 per cent. You could be forgiven for not knowing this because much of the increase has suddenly appeared as a result of the Bureau of Statistics' revisions to the national accounts.
The bureau doesn't measure saving independently, just takes it as the residual when it compares two huge numbers: for household income and for household consumption. So any errors in measuring those two big numbers will be reflected in the figure for saving, making it volatile and subject to revision as better information comes to hand.
Since 2004 household disposable income has grown strongly, averaging 7.3 per cent a year in nominal terms (that is, before allowing for inflation). Over the same period, household consumption has grown by 5.4 per cent a year.
Dr Philip Lowe, an assistant governor of the Reserve Bank, expressed the figures differently in a speech he gave this week. In quite a few of the years during the decade and a half to 2005, household consumption increased by more than a dollar for every extra dollar of household disposable income received.
Since then, however, only about 65¢ in every extra dollar of income has been spent. (Small prize if you realised this measure is that old Keynesian workhorse, the ''marginal propensity to consume''.)
The evidence that something has changed in our attitude to saving can be seen in other indicators. One example comes from the annual survey of Household, Income and Labour Dynamics in Australia.
In the surveys between 2000 and 2005, there was a clear trend of fewer and fewer households with mortgages reporting they were ahead of schedule in their repayments (a way of saving). But this downtrend slowed in about 2005 and then in 2009 - the most recent year for which results are available - there was a marked increase in the share of people saying they were ahead of schedule.
Similarly, over the past couple of years there has been an increase in the proportion of households who say they pay their credit card balance in full each month. It has gone from about 60 per cent to almost 65 per cent.
Then if you look at the Westpac-Melbourne Institute monthly survey of consumers you find there has been a marked increase in the number of households saying the wisest thing to do with their savings is to pay down debt or build up bank deposits.
Correspondingly, there has been a decline in the perceived attractiveness of more risky investments.
A final bit of evidence comes from the estimates of how much equity households are adding to the housing stock. Until the late 1990s, it was normal for the value of newly constructed homes each year to be significantly greater than the increase in the amount we all owed on our housing.
Why? Because, while the people buying the newly-built homes would usually borrow most of the cost of the home, other, established home owners would be trying to pay back their mortgages as quickly as they could (mainly by keeping their monthly mortgage payments higher than the bank's minimum requirement).
In other words, the proportion of the nation's total amount of housing that wasn't owed to banks would increase each year. Economists call this ''equity injection''.
But during the early part of the noughties this changed and the household sector was withdrawing equity. Now here's the point: in recent years things have changed again and we've returned to the usual pattern of increasing equity.
So what's going on? Why did we stop saving and why have we started again? Over the decade to 2005, there was a large run-up in household debt and a related rise in the (gross) value of household assets such as homes and shares, while our rate of saving declined.
This seems to have been a period of adjustment to the fall in nominal interest rates (caused by our return to low inflation) and financial innovation (banks keener to lend for housing, with new products such as home-equity loans and reverse mortgages).
Lower nominal mortgage rates allowed us to borrow more, which many of us did at much the same time, thus bidding up house prices in the process. Some of us even increased our mortgage to pay for an overseas trip.
But it seems this period of adjustment to new possibilities was largely completed by the mid-noughties and we've gone back to our usual preference for paying off the mortgage as soon as we can.
And then this episode of ''structural adjustment'' seems to have been reinforced by the global financial crisis, which has led some households to rethink their spending and borrowing decisions. Some people are a lot more cautious and a lot less sure that house and share prices can only ever go up.