The drivers of this crisis are numerous and complex, including under-investment, government over-stimulus, supply chain disruptions, and also some examples of corporate greed. Judging from the somewhat free-spending recent federal budget, it also appears that higher interest rates will be the only policy instrument available to combat sticky inflation. This would further exacerbate the housing crisis.
Unfortunately, the only historically proven solution to higher prices is lower demand, and this is certainly underway as consumers tighten their belts.
In short, the Australian consumer is caught in a vice. The government has acknowledged that we are already facing a housing crisis. However, the results of a recent survey1 by the People's Commission into the Housing Crisis paints a bleak picture of just how financially pressured Australians are becoming. Three in five respondents are in housing stress and are taking extreme steps to cut costs. A high proportion of respondents are turning to credit to make ends meet while nearly a third are skipping meals. Almost half of respondents are avoiding essential visits to the doctor in a bid to reduce costs.
The Australian Bureau of Statistics (ABS) refers to essential spending as “non-discretionary”, a category that covers goods and services purchased to meet a basic need, maintain current living arrangements, and legal obligations. Food, shelter, healthcare, car maintenance, education and compulsory insurance are all included in non-discretionary spending and while people may switch to cheaper alternatives, they can’t really stop paying for such goods and services in total.
Nevertheless, ABS data on spending confirms that the consumer is cutting back even on these essential items. In Figure 1 below we take the ABS’ non-discretionary year-on-year time series and subtract the corresponding yearly consumer price index (CPI) change to strip out the impact of inflation: this is referred to as a ‘real’ number. Both series are in a downward trend, but what we now see is that the latest real number is hovering just above zero.
Figure 1. 12-month change in household non-discretionary spending
Diving deeper into the household spending data we see confirmation of the worrying survey results. According to the end-March numbers, Australians cut back on spending on healthcare by over 6% over the past year. Apart from the catch-all Miscellaneous goods and services category, no other category saw such a pullback. Have Australians suddenly become healthier? This is unlikely. In data released by the ABS in December 2023, eight in ten (81.4%) people had at least one long-term health condition, while one in two (49.9%) Australians had at least one chronic condition.2
Figure 2. 12-month change in Australian inflation-adjusted household spending by category
How long will we be caught in the price vice? Figure 3 shows the 12-month change in inflation for the past six months. Unfortunately, the latest set of inflation numbers (in orange) aren’t positive. On top of already higher prices, inflation numbers have started to tick up again. Healthcare registered one of the largest jumps, with prices rising 6.1% over the past year, over twice the top end of the RBA’s 2-3% inflation target. Part of this was driven by a 7.1% increase in pharmaceutical product prices in Q1 2024 alone, due to fewer consumers qualifying for subsidies under the Medicare Safety Net and Pharmaceutical Benefits Scheme.
Figure 3. Monthly Australian CPI Indicator and Groups
While continuing to participate in market rallies, we believe the trend towards lower consumption is clear. Lower consumption will lead to lower corporate revenue, which is not currently factored in by many investors. It is this underappreciation of the looming potential slowdown that leads us to retain a cautious asset allocation in our Dynamic portfolios, preferring to be overweight defensive sectors like government bonds (delivering a 4-5+% income) and underweight Australian and US equities, which in our opinion would be the most susceptible to a slowdown.
1 https://everybodyshome.com.au/peoples-commission-into-the-housing-crisis-unveils-human-cost/