Reserve Bank says Aussies are 'trying to look rich' instead of being financially responsible
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Australians are being urged to be careful with their spending and borrowing habits, as a new report from the Reserve Bank has warned of more interest rate rises to come.
The report titled Do Australian Households Borrow to Keep up with the Joneses? discusses how some Australians may be over-extending themselves financially just to 'keep up' with those around them.
Kim Nguyen, a Reserve Bank economist, said that while this behaviour may not seem like a big deal at first, it could eventually lead to financial instability for households if they become too overextended.
'If this "keeping up with the Joneses" leads households to become overextended, and more sensitive to negative shocks [an unexpected event that affects an economy e.g. natural disasters],' she explained.
Nguyen went on to say that this issue is especially severe in wealthy postcodes where income inequality is high. She also noted that car debt rises moderately in tandem with increases in local inequality.
'The accumulation of car debt lends evidence to the traditional "conspicuous consumption" channel with households trying to close consumption gaps in a conspicuous manner,’ she said.
Ms Nguyen explained, ‘conspicuous consumption’ is a sociological term for the purchase of luxury items as a means of displaying one's wealth. This is usually done because they were concerned about being perceived as ‘unfashionable’ or ‘poor’.
'The map of greater Sydney, for instance, reveals that income inequality in the northern and eastern suburbs is much higher than in the west and southwest of Sydney,' Ms Nguyen said.
Still, Nguyen urged caution for all Australians when it comes to spending and borrowing, especially in light of the current inflation rate and the Reserve Bank's expected interest rate hikes.
'Such a channel could be particularly concerning if the households that take on the additional risky investments were financially fragile,' she warned.
What are your thoughts on this, members? Have you seen evidence of your neighbours or friends trying to portray a more lavish lifestyle than they’re really living? Comment below and let us know!
The report titled Do Australian Households Borrow to Keep up with the Joneses? discusses how some Australians may be over-extending themselves financially just to 'keep up' with those around them.
Kim Nguyen, a Reserve Bank economist, said that while this behaviour may not seem like a big deal at first, it could eventually lead to financial instability for households if they become too overextended.
'If this "keeping up with the Joneses" leads households to become overextended, and more sensitive to negative shocks [an unexpected event that affects an economy e.g. natural disasters],' she explained.
An economist says that Australians are borrowing too much money just to 'keep up' with their neighbours. Credit: Pexels/Enric Cruz López.
Nguyen went on to say that this issue is especially severe in wealthy postcodes where income inequality is high. She also noted that car debt rises moderately in tandem with increases in local inequality.
'The accumulation of car debt lends evidence to the traditional "conspicuous consumption" channel with households trying to close consumption gaps in a conspicuous manner,’ she said.
Ms Nguyen explained, ‘conspicuous consumption’ is a sociological term for the purchase of luxury items as a means of displaying one's wealth. This is usually done because they were concerned about being perceived as ‘unfashionable’ or ‘poor’.
'The map of greater Sydney, for instance, reveals that income inequality in the northern and eastern suburbs is much higher than in the west and southwest of Sydney,' Ms Nguyen said.
Ms Nguyen noted that car debt was higher in wealthier suburbs. Credit: Pexels/Torsten Dettlaff.
Still, Nguyen urged caution for all Australians when it comes to spending and borrowing, especially in light of the current inflation rate and the Reserve Bank's expected interest rate hikes.
'Such a channel could be particularly concerning if the households that take on the additional risky investments were financially fragile,' she warned.
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