Is Australia’s high savings rate an illusion?

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By Leith van Onselen

Australia’s high household savings rate, which is currently running at over 10% (see next chart), is viewed as a key plank in the RBA’s plans to “rebalance” the economy away from mining-led growth. The Rationale behind the RBA’s plan is that if it cuts interest rates hard enough, then households will save less and consume more, in turn boosting interest rate sensitive sectors of the economy such as retail sales and housing, which would then grow at a faster rate than disposable incomes.

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New research from Credit Suisse’s Damien Boey, however, questions whether Australia’s savings rate is really all that high and whether Australian households are in the position to drive the economy’s rebalancing.

According to Boey, Australia’s official household savings rate is “somewhat illusory”, biased upwards by “compulsory saving (superannuation) and does not properly take into account principal payments on mortgages”. When adjusted by these factors, he believes that Australian “households are really not saving much at all”, making them poorly placed to offset the expected unwinding of the mining investment boom.

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The issue around compulsory super is that it is locked away until retirement age, therefore, the ability to withdraw from these ‘savings’ to fund consumption is limited. And “removing superannuation from the official saving rate lowers the discretionary saving rate to 2 per cent from 10 per cent”, according to Credit Suisse.

A more serious issue surrounding the ABS’ official household savings rate is that it “does not properly take into account mortgage principal payments, which currently make up a large proportion of the cash cost of housing”:

We can measure net mortgage principal payments as the difference between gross loan approvals and credit growth. Adjusting for both superannuation and principal payments, we find that the discretionary saving rate falls to minus 3.6 per cent from 2 per cent. This measure of the discretionary saving rate is not only low in absolute terms, is also low by historical standards.

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Credit Suisse does, however, acknowledge some potential pitfalls in its analysis:

Perhaps [our] measure of discretionary saving understates how much households actually do save, because our measure of net principal payments includes those that are ahead of schedule – not minimum payments.

Indeed, these discretionary principal payments could be viewed as a form of saving. However, we note that if households were not making such large principal payments, debt would be accumulating at an even faster pace, and the interest burden would be considerably higher in future periods.

Nevertheless, it does still conclude that the household discretionary savings rate – i.e. the amount of savings that are actually available to fund consumption – is “…not as high as the official measure suggests [and] is actually slightly below long-run average levels. Therefore, we do not believe Australian households have a large pool of saving to draw down on and consume.”

The only way that Credit Suisse can foresee a significant rise in household spending were if Australia experienced “a significant increase in asset prices or a material easing of bank lending standards to cause households to reduce savings”.

However, it is not convinced that such a scenario is likely since “banks might tighten their lending standards in the short term due to regulatory concerns about excessive gearing. So overall, the threshold for dis-saving is quite high”.

Overall, Credit Suisse does not believe that household consumption will be anywhere near enough to offset the contraction in mining investment, which would mean that Australian GDP growth would be slower than forecast, and official interest rates will remain low for an extended period.

As explained by Houses & Holes yesterday, we tend to agree.

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  1. I m not sure why principal repayment would not be considered as saving.It s a saving and the cash value is available for consumption (either by offset or redraw)

    • Yes under certain circumstances and especially if your ahead on your mortgage. Those of us mere mortals who don’t 5 IPs will have a principal + interest loans on our homes where you have an obligation to pay the principal. Under these circumstances, calling it a saving is a it misleading.

      • many loans are interest only for 5-10 years, but even if you consider the minimal princpal repayment out, with these interest drop 90% kept the same repayment, they used to pay 8% interest, and are now putting 1 grand a month in direct saving ( advance repayment, almost all homeowners have years of advance payment ( house are paid in 15 years or something like that) and theycan redraw from it.

    • A line needs to be drawn somewhere. That extra principal repayment is held against the asset which is subject to market valuation. No problem in solid markets like we’ve had here for 20 years, but consider the American case where the asset tumbles 50% in value, wipes out owner equity and the bank denies any further redraw/LOC transactions. Is it still savings then? If not, where does the line get drawn? Owner equity? It’s a dubious and difficult definition.

  2. A recent survey of savers by CBA showed that more than 50% of savers were saving for an overseas trip. That money won’t boost local consumption .

  3. Just look at the pattern of household savings from 1985 onward.

    Until the GFC it went steadily down and became negative.

    Aren’t Australians lucky they had the CANEC(*) superannuation system to ensure that they were saving enough for retirement.

    – – – – –

    (*) “convoluted and needlessly expensive compulsory”

  4. Another chart that shows the demographic change that drove savings up from 2003. I am amazed at how many think savings only started to trend up since the GFC.

  5. We all knew that the household balance sheet, John Howard’s favourite economic hollow log, had been raided so many times it resembled a bikies club house, and we know that the level of household debt as a percentage of disposable income has barely shifted following the GFC.

    So it is not entirely surprising that the reborn little Aussie Saver is largely a myth and the RBAs attempt to rewire his brain back to endless consumption has been a waste of time as he never really changed anyway – he is just fully stretched already.

    But don’t think the RBA get this – the whole organisation is built around the current model of debt driven economic management and to change course now would require more working groups and international study tours than Joe can afford.

    Full speed ahead to ZIRP and beyond!

    To the polite applause of the FIRE industries.

    • “John Howard’s favourite economic hollow log, had been raided so many times it resembled a bikies club house,”

      🙂 You really do write some GOLD! My sense of humour is failing me!

      “Full speed ahead to ZIRP and beyond”
      Yep! Let’s have zero rates and a cash rebate for borrowing. That will really get the economy buzzing and we’ll all be rich!
      For those who think the suggestion sounds ridiculous it is, in fact, no more ridiculous that the call for maintaining the current negative RAT rates to boost consumption. It’s just a question of degree!

    • Agree completely Pfh007, Aussies savings are a complete illusion. How can a macro economic system with collapsing export productivity possibly have increasing savings?

      We are so unbelievable lucky that we have world class mineral deposits and have constructed world class mines because these are Australia’s only real Assets (sources of positive export net free cash flow). It follows, in my mind, that increasing their productivity is our only real national source of savings.

      To me it seems more intuitive to measure a nations savings as a change in its asset base or alternatively as a change in its CAD/CAS. While a change in bank deposit levels is interesting, it’s not macroscopic savings.

      • Not to take away from your point CB as I agree entirely however unfortunately this bit is not true
        “sources of positive export net free cash flow”)
        Well they would be if we owned them. Unfortunately, as we’ve discussed. they are already mostly sold to fund our previous over-consumption.
        We’re really seriously screwed and all teh RBA can think about is lowering rates to stimulate more over-consumption. It’s getting harder to stay sane in an insane world!

    • At the next interest rate cut gold will look even more attractive, and it will be time to seriously consider removing cash from the bank and placing it out of harms way.

      With Joe Hockey’s debt ceiling at 500Bn and the RBA and big-4 banks
      going for broke in residential housing, it looks as though the RBA and government think a complete crash is a fait accompli.

    • Jumping jack flash


      The only way is ZIRP forever, especially since we see people still piling on the debt in a period of ultra-low interest rates.

      If the banks were to raise them at all, it would be a bloodbath, and they would be caught right in the middle of it.

      On a similar note, I notice that my bank has cut term deposit rates again. Independently of the RBA

  6. Conceptually Credit Suisse seems to have ‘household savings’ pretty close to correct. Spending on housing is not ‘saving’ So CS are looking at the net flow of money into housing.
    The point of the CS analysis seems to be the potential for increased consumption expenditure and as UE and HnH point out that doesn’t look to be high.
    As far as the saving rate goes is there a bit of a logical gap in the CS analysis in deducting all the Super Contributions and then also measuring the increased credit growth. Is not much of the Super Contributions being used to fund that Credit Grwoth? In that case you are of double deducting.

    However when I see these statements my blood boils “official interest rates will remain low for an extended period.” Please, when those statements are made, also state that ‘in that case further foreign debt will be added to the already high levels and a programne of resource asset sales including industry, Ag Land and Mines must be set up to fund the attendant profligacy” When are we going to stop pretending that low interest rates, meaning negative RAT, are some sort of money for nothing?

    If we are looking at potential for increased consumption expenditure we should also be looking at the potential for governments to run bigger deficits to inject more (unearned) money into the household sector. Perhaps we are looking at future tax increases and withdrawals from households rather than injections?

    As to actual ‘savings’ we have not had ‘savings’ for more than five decades. The ‘Official Saving’ is just total baloney. If you are going to include Super contributions you have to look at where those contributions are being spent. If, in the situation Australia is in, they are being recycled straight back into household expenditurre in the form of housing loans, loans for personal expenditure or shopping malls then Super Contributions are not being saved either.
    Rumples post here, and attendant commentary, should be read in conjunction

    The best summary of all this is still the question “If we are saving so much then why do we run a substantial and chronic CAD, which has now run continuously for 54 years bar one, through even the highest ToT in history?”

    Anyway WGARA? The RBA should immediately cut rates and cut hard (minimum 1.5%)to boost the housing bubble and to stimulate housing and other personal consumption expenditure.
    Screw the nation, it’s young people and the future children. Screw the whole damned world as well! Let’s have really low interest rates so we can really consume properly and use up our world at an even faster rate. I’m sick of bloody caring in the face of this low interest rates stupidity!!!!!!!!!

    • Exactly. How on earth could Australians have a high savings rate when everything here costs 2x or 3x what I paid in the USA? Doesn’t compute.

      • Heck, stuff in Australia usually costs 50% more than it does in most European countries, FFS.

        My most recent experience was buying tyres for my car – $300 each here, $130ea in the US. Even after spending $300 getting them shipped over and another $140 to have them put on, I was still $250 in front.

  7. It all makes sense now why I can’t afford a house – it’s that savings component of my budget that no one else seems to have.