In alarming news for retailers but comforting to a Reserve Bank determined to prepare for a mining boom, a Herald analysis of Bureau of Statistics figures shows that since mid-2005 households have saved $221 billion.But not all the money is parked in bank deposits or under the mattress; much of the saving has been used to reduce debts, including mortgages, credit cards and personal loans.
The clothing and footwear retailer Colorado Group was placed in administration this week amid the tougher retail conditions, and Gerry Harvey announced his company, Harvey Norman, would launch an online store to lure bargain hunters.
An economist at the Grattan Institute, Saul Eslake, said the shift to higher saving was a return to a more historically normal level of savings after the unprecedented debt binge of the 1990s and early 2000s, when households responded to lower interest rates and easier access to credit.
“For a long time, until the early years of this decade at least, we managed to contain our lust for stuff to within the level of our income,” Mr Eslake said.
In the mid 1970s the household savings ratio – how much households save out of every dollar they earn – peaked at 18¢ in the dollar. It fell steadily until the early 2000s, when households were regularly spending more than they earned.
From the mid-1990s to the mid-2000s household debt as a proportion of annual household disposable income shot up from 70 to 150 per cent.
But the most recent figures suggest households are again living within their means, saving 10¢ in every dollar earned.
The global financial crisis, which reached a dangerous phase in late 2008, accelerated the savings drive.
Consumers reassessed the riskiness of debt as lower interest rates and government stimulus money provided the means to get ahead in repaying loans.
The collapse of the US property market and global sharemarkets undermined Australian confidence that asset prices would rise forever, Mr Eslake said. “Consumers are well aware of what’s happening in America. People have become much less sanguine about the prospect of rising asset prices doing their savings for them.”
In 2008 and 2009, when interest rates fell, almost half of Australian mortgage holders opted to keep repaying their loan at the same level to pay it off faster, rather than spend the difference, an analysis by the Reserve Bank last month has shown.
A Commonwealth Bank economist, James McIntyre, said the increase in household savings was the result of a deliberate strategy by the Reserve Bank to clamp down on households with higher interest rates to make way for the mining boom.
“The mining boom is like a runaway freight train that’s coming down the track and there’s nothing the Reserve Bank can do to stop it,” Mr McIntyre said.
“The only thing [it] can do is clear the tracks and get everyone out of the way.”