Despite an improvement in major cities, regional households’ financial comfort continue to deteriorate

The financial comfort of households across regional Australia weakened during the second half of 2019 and bucked the improvement witnessed in major cities, according to the latest study by ME Bank.

The study showed a 4% decline in the financial comfort of regional households, extending its decline during the previous year and hitting its lowest point in the past eight years. This downturn has brought the gap between regional and metropolitan households to 13%, twice the historical average of 7%.

"The sharp fall in financial comfort in regional areas is likely a result of ongoing drought and recent bushfire catastrophes, which have significantly lowered already-low levels of financial comfort," said Jeff Oughton, consulting economist at ME Bank.

The softness was apparent in several categories, including the regional households’ comfort with their savings, their ability to deal with financial emergencies, and their long-term retirement plans.

Households in regional Queensland reported the most significant deterioration in financial comfort. The region's financial comfort index slipped by 14%, dipping below the index in New South Wales and Victoria.

The decline in regional areas was in stark contrast to the improvement felt in metropolitan markets.

"In contrast, the improvement in the financial comfort of metropolitan households reflected significant gains in all key drivers, with record-high levels of comfort approached in Sydney, Melbourne, and Brisbane," Oughton said.

The uptrend seen in metropolitan cities managed to keep the national financial comfort index afloat during the second half of 2019.

The most notable development was observed in the households' comfort with debt. Oughton said this is due to the record-low mortgage rates and the robust growth in housing values.

"Significantly lower home loan rates and relatively low and stable unemployment rates helped to significantly improve 'comfort with debt' — especially in major capital cities, while a partial reversal of the fall in residential property prices in eastern capital cities and expectations of further price gains have also eased gearing concerns," he said.

Furthermore, the sustained drop in the unemployment rate has led to the moderation of mortgage stress during the period. The share of households contributing 30% of their income towards their mortgage fell to 41%. While this rate is still high, it has fallen considerably over recent years.

More households are also feeling better due to the historically-low official interest rates. The Reserve Bank of Australia made a historic move last year when it made three cuts to the cash rate that ultimately brought it to a record low of 0.75%.

"Those households paying off a mortgage felt they were far better off than those renting or who already own their homes. When it came to investors with debt, results show they feel they've benefitted the most from the flow on to record low mortgage rates – an indication of the high level of gearing among residential property investors in Australia," Oughton said.