Household savings hit record high as Australians brace for recession

It seems counter-intuitive but at a time when prices are rocketing and mortgage payments are crushingly high, Australian are depositing more money in the bank than ever.

Yes, even more than during the COVID pandemic when there were literally fewer opportunities to spend your money.

At the same time, indicators such as the number of people falling behind on their home loan repayments has jumped to a two-year-high and consumers are using high-interest, short-term loans to balance their books, it seems totally bizzare that bank deposits are so high.

The other strange thing to consider is that the household savings rate – which rose to an incredible 19.8% during the pandemic, has now fallen to just 3.7%, the lowest number since 2008.

That doesn’t mean that saving has stopped, just that the amount being saved is much less, which seems sensible given the amount of pressure most (but not all) household budgets have been hit with.

The two partial explanations that make some sense are that households are battening down their finances as the chance of a recession grows and that many households are maximising their use of offset accounts as the best way for them to save money.

Are savings showing the wisdom of crowds?

Given the rapid burst of 12 official interest rate rises in just over a year, both theories have some merit and if they turn out to be true, once again show the wisdom of crowds – in this case, Australian consumers.

You will be hard pressed to find an economist at the moment who is not concerned about the Australian economy falling into a recession – indeed we are already there in a per-capita sense, given high levels of immigration.

And socking as much money as possible in an offset account makes a lot of sense, given you are effectively earning – or saving – the current rate of mortgage interest without paying any tax, which you would do with a traditional term or at call deposit.

Plus, that money is still available if needed – meaning it still shows as savings for now but may be destined for a fast withdrawal later on.

Whatever the reasons, there is no hiding the fact that Australians are socking money into banks accounts like there is no tomorrow, even though many economists think that cost pressures will see many households rip through those savings very quickly.

An amazing $1.37 trillion in savings

Figures from banking regulator APRA show that Australians stashed away another $100 billion in bank deposits in the year to April 30, taking the total to a record $1.37 trillion.

That means that for the first time ever, the big four banks hold more than $1 trillion of customers’ cash on deposit.

Commonwealth Bank alone has $370 billion in deposits – getting close to double what it held in those glorious pre-pandemic days of April 2019.

Even in the past year as the cost of living skyrocketed, Commonwealth added another lazy $20 billion in deposits.

The APRA figures show a similar situation across the other banks with Macquarie’s $55.9 billion in deposits representing a very impressive tripling since 2019 – coming at a time when the bank greatly expanded its share of mortgages and also offset and deposit accounts, some with attractive interest rates.

Are higher rates and lower spending playing a part?

Some of the other plausible explanations for the extra cash deposits are that people are really sharply reducing their spending and banking savings as a result and also that excess cash that has been stashed at home has now been banked to earn rising deposit rates.

Whatever the reasons for the rash of intense saving, there has never been a better time to make sure that you are not getting dudded with a non-competitive deposit rate.

Now that official rates are at 4.1%, there are some deposit accounts that are offering interest rates above 5%, although these usually come with a range of conditions and hoops to jump through.

That said, you should easily be able to earn above 4% on your deposit by shopping around so make sure your bank isn’t taking advantage of you with a measly rate with a 2 in front of it, or even less.