The Household Expenditure Measure, commonly referred to as HEM, is a financial benchmark used within Australia to approximate the basic living expenses of households. Devised by the Melbourne Institute of Applied Economic and Social Research, the HEM reflects a modest level of weekly household expenditure tailored for various family types. This serves as a practical tool for banks and other lending institutions to assess a borrower’s living costs.
Lenders use HEM as a conservative gauge of your everyday expenses to evaluate home loan applications. It categorises over 600 items from the Australian Bureau of Statistics’ Household Expenditure Survey, ranging from essentials to discretionary spendings. Your location, number of dependents, and lifestyle standard are among the factors influencing the HEM’s assessment, ensuring a tailored approach to determining your financial footprint.
Key Takeaways
- HEM is a standard benchmark for estimating living expenses.
- It caters to various family structures and considers lifestyle and demographics.
- The measure is integral to the home loan assessment process.
Understanding Household Expenditure Measure (HEM)
The Household Expenditure Measure, or HEM, serves as a guide utilised by lenders in Australia to estimate your typical living expenses. When you apply for a home loan, understanding the HEM can greatly influence your borrowing capacity.
What is the HEM?
- The HEM is a benchmark reference established to calculate minimum living expenses for different types of households.
- Developed by the Melbourne Institute, it incorporates data from the Australian Bureau of Statistics’ (ABS) Household Expenditure Survey.
How HEM Affects You
- Banks and lenders adopt the HEM to evaluate your loan application, ensuring that borrowers can maintain a basic standard of living without financial hardship.
- Loan assessors use the HEM to determine if your declared living expenses are realistic and to prevent underestimation that could lead to future financial distress.
Categories of HEM
- Basics: Essential services and needs.
- Discretionary Basics: Non-essential but common expenses.
- Non-Basics: Luxuries and other non-essential spending.
Legal Framework
- Under the National Consumer Credit Protection Act 2009, ASIC mandates lenders to make responsible lending decisions, for which the HEM can be instrumental.
Your Role
- As a borrower, it is beneficial to be aware that your income, location, and the number of dependents factor into the HEM calculation.
- When reporting your spending, note that lenders will cross-verify your stated living expenses with the HEM benchmarks to ensure responsible lending practices are followed.
By comprehending the HEM, you position yourself to provide transparent information to lenders and understand how they assess your financial capability.
Components of HEM
The Household Expenditure Measure (HEM) is a framework used by lenders in Australia to estimate your living expenses for loan assessment. This benchmark considers various expenses categorised into basic and discretionary spending, as well as costs for household services and goods.
Basic Living Expenses
Your basic living expenses encompass the essential costs required to maintain a reasonable standard of living. They include:
- Food: Groceries and home-prepared meals.
- Housing: Payments for rent or mortgages.
- Utilities: Electricity, gas, water, and council rates.
- Phone and Internet: Communication necessities.
- Transport: Vehicle costs, public transportation.
- Clothing and Footwear: Essential attire.
- Personal Care: Basic hygiene and health products.
Each category reflects costs relative to different family compositions and regions across Australia, such as Victoria, Tasmania, or the Northern Territory.
Discretionary Spending
Discretionary expenses account for lifestyle choices that vary significantly among individuals and include:
- Dining Out and Entertainment: Spending at cafes, restaurants, clubs, or cinemas.
- Recreation and Culture: Costs related to hobbies, sports, and cultural events.
- Alcohol: Purchases from bottle shops or bars.
- Items and activities which are considered “non-basics” or “discretionary basics”.
Understanding your discretionary spending is key, as lenders use this to assess financial behaviour alongside your essential expenses.
Household Services and Goods
This category covers a range of products and services that contribute to the running of your household, such as:
- Furnishings and Household Equipment: Furniture, appliances, and home maintenance tools.
- Housing Services: Cleaning, gardening, and other home-related services.
- Household Goods: Items that have a limited life span or are consumable, such as cleaning products.
The HEM framework captures variations in these costs for different states like Western Australia, South Australia, and the Australian Capital Territory.
HEM in Home Loan Applications
When considering a home loan, the Household Expenditure Measure (HEM) plays a critical role in how lenders calculate your borrowing power. It’s important to understand that HEM is used to estimate your living expenses, which in turn impacts how much you can borrow.
HEM in Mortgage Assessment
During the mortgage assessment process, banks and lenders utilise HEM to evaluate your ongoing living costs. The HEM incorporates expenses across a range of categories, considering the number of people in your household and the lifestyle maintained. It’s derived from extensive data collected by the Australian Bureau of Statistics. Borrowing Power is linked to HEM; the higher your estimated expenses, the lower your potential borrowing capacity may be.
Lender’s Use of HEM
Banks like ANZ and other participating lenders apply the HEM benchmark as a conservative way to estimate expenses for loan applicants. This benchmark became particularly prominent following the banking royal commission, which led to a more stringent application of the National Consumer Credit Protection Act’s responsible lending obligations. Lenders must ensure that your mortgage repayments will be affordable, over and above your estimated HEM.
| Living Standards | Annual HEM Benchmark |
|---|---|
| Basic | $32,400 |
| Moderate | HEM data + additional factors |
| Lavish | HEM data + various lifestyle costs |
Borrower Considerations
As a borrower, it is vital to provide accurate details of your income and living expenses using a living expenses calculator. Misestimating can affect loan approvals. It’s advisable to review your bank account statements and bills to ensure an accurate representation of your financial situation. ASIC recommends that you maintain a buffer for unexpected expenses, which could impact your ability to meet mortgage repayments. Moreover, it’s in your best interest to understand whether your lender uses the HEM and how it could influence your home loan options.
Remember that living expenses are but one part of the overall assessment conducted by the lender to determine your borrowing capacity. Your income and other financial commitments are also closely scrutinised to ensure a responsible lending decision is made.
Data and Methodology of HEM
In understanding the Household Expenditure Measure (HEM), it’s crucial to look at the data sources which inform it and the calculation methods that give it shape. These help establish the HEM’s credibility as a financial benchmark.
Data Sources
HEM leverages comprehensive data to provide a reliable measure of household spending. Key sources of this data include:
- The Household Expenditure Survey (HES), conducted every six years by the Australian Bureau of Statistics (ABS), which delves into expenditure patterns across Australian households.
- Bank transactions data, which offers real-time insights into spending habits.
- Data from national accounts and retail trade to adjust for broader economic changes.
This aggregated data encapsulates various aspects of spending, from necessities like rent and food to discretionary items such as alcohol and tobacco.
Calculation Methods
The approach to HEM’s calculations entails indexing and statistical analysis to produce nuanced understandings of household spending. Highlighted methods include:
- Seasonally adjusted estimates to negate cyclical variances and trading day impacts.
- Utilisation of household final consumption expenditure within the Monthly Household Spending Indicator for more up-to-date snapshots.
- The application of HEM benchmarks, which are grounded in the median and 25th percentile measures of spending on basics from the HES as classified by the Melbourne Institute.
Calculations are thus performed in a way that aims to be experimental yet reliable, providing a benchmark figure that financial institutions may use for assessing loan affordability and other applications in accounting and financial planning.
Impacts of Lifestyle and Location
When you consider the Household Expenditure Measure in Australia, your lifestyle choices and location play significant roles in defining your living expenses.
Regional Variations
In Australia, the cost of living can vary considerably depending on whether you reside in a metropolitan area like Melbourne or a more remote region such as the Northern Territory. Housing costs, utilities, and transport can be substantially higher in capital cities, reflecting the demand and higher costs associated with urban living. For example:
- Housing Costs: In capital territories, especially in Australian Capital Territory or Victoria, you’re likely to pay more than you would in, say, Tasmania or South Australia.
- Utilities: Costs for utilities can be elevated in places with extreme weather, like Western Australia, where air-conditioning is not a luxury but a necessity.
- Transport: Accessibility and availability of public transport in states and territories can reduce or increase your reliance on private vehicles, influencing your overall expenditure.
Lifestyle Choices
Your lifestyle heavily influences discretionary spending, with choices around entertainment, recreation, and culture adding to your annual expenses. A ‘basic’ lifestyle, for instance, estimates lesser expenses compared to a ‘lavish’ one. Consider the following specifics:
- Dependents: The more dependents you have, the higher your expenditure on essentials and recreation will likely be.
- Discretionary Spending: This includes outings, cultural events, and other forms of recreation that vary in cost from state to state.
- Alcoholic Beverages and Tobacco: These are considered discretionary items, and while they represent a small portion of your total expenses, they can add up, especially if your lifestyle includes regular social outings.
Your expenditure on such items as entertainment and alcoholic beverages may fluctuate based on lifestyle standards classified from ‘student’ to ‘lavish’. In tackling your budget, it’s crucial to assess these aspects in conjunction with where you live.
HEM and Financial Wellbeing
The Household Expenditure Measure (HEM) is a crucial tool for gauging the financial state of Australian households. It reflects essential spending across various categories, influencing aspects like budgeting and borrowing capacity.
HEM For Budgeting
Your monthly budget reflects various important items, ranging from essential spendings like housing, insurance, and utilities to discretionary expenditures like clothing, personal care, and entertainment. HEM benchmarks average monthly household spending, helping you assess if your spending on goods and services aligns with or deviates from typical household budgets. By considering HEM in your financial planning:
- It can inform your decisions on where to adjust expenses.
- It provides a basis for gauging the adequacy of your savings and your ability to offset unexpected costs.
HEM and Borrower’s Financial Health
When you apply for a loan, lenders use HEM to evaluate your financial health. It factors into the determination of your borrowing capacity, affecting loan approvals:
- Essential expenditures such as education and housing are considered to ensure you can maintain a basic standard of living.
- Lenders use HEM to estimate if you can manage additional debt without compromising on essential spendings.
A healthy HEM ratio suggests a sound financial position, indicating that after meeting essential and discretionary expenses, you still maintain capacity for savings, loan repayments, and wealth accumulation. An overextended spending pattern, on the other hand, might reduce your borrowing capacity and raise concerns about potential credit card debt or financial instability.
Critical Perspectives on HEM
The Household Expenditure Measure (HEM) has faced various critical perspectives, particularly regarding its accuracy and adequacy in reflecting actual living expenses and modern spending habits.
Controversies and Limitations
HEM has been a controversial tool within Australia’s financial services. Originally designed by the Australian Bureau of Statistics (ABS), it is now widely used by banks to assess household spending for loan suitability under the National Consumer Credit Protection Act. Its adoption has sparked debate due to potential limitations related to the measure’s reflection of true living costs.
Critics argue that HEM lacks precision because it predetermines living expenses without accounting for individual or locational differences. The measure is an average, occasionally leading to underestimation of living expenses, particularly for households with above-average needs or those living in high-cost areas. The concept of ‘basic’ living costs is also under scrutiny, as it may not reflect the reality of modern living standards where lifestyle, entertainment, and communication costs are significant.
While initially intended to promote financial stability, questions are raised regarding the tendency for HEM to allow greater borrowing than what might be sustainable for a household’s income. If banks rely too heavily on HEM, they might inadequately assess the risk of lending, potentially leading to financial stress for borrowers.
HEM Relevance to Modern Spending Patterns
When considering modern spending patterns, HEM’s relevance is often questioned. The measure may not be capturing contemporary consumption behaviours accurately, especially with rapid changes in how people allocate their annual spendings. The evolution of technology and the digital economy has vastly altered spending habits, where expenditures on digital services, modern entertainment, and communication have become integral to everyday life.
Furthermore, as the cost of living increases and household spending diversifies, the HEM may need more frequent updates to stay aligned with final consumption expenditure in Australia. The challenge lies in providing a benchmark that accurately represents a wide array of expenditures, from retail indulgences to essential services, which together make up a modern household’s budget. The current application of HEM may not fully encapsulate the shift towards these new categories and higher standards of living.
Frequently Asked Questions
When you’re managing your personal finances or applying for a loan, understanding how to measure your household expenses is crucial. The Household Expenditure Measure (HEM) is a common benchmark used in Australia that can help you with this task.
How can one calculate their household expenses using the HEM?
To calculate your household expenses using the HEM, you first need to identify which consumer spending category your family falls into. The HEM benchmarks various expense categories, enabling you to estimate your annual living expenses based on your household type and spending behavior.
What are the typical categories included in the calculation of household expenses?
Typical categories reflected in the HEM include basics such as food, clothing, and utilities, as well as discretionary expenses like dining out, entertainment, and personal care. Financial institutions may use these categories to gauge your spending habits.
How does the Melbourne Institute contribute to understanding household expenditure?
The Melbourne Institute undertakes comprehensive research into household spending patterns in Australia. Their findings are vital in updating and refining the HEM to reflect current statistical data, ensuring an accurate measure of household expenses.
What averages are considered for monthly living expenses in Australia?
Averages for monthly living expenses in Australia consider a range of factors including household size, location, and lifestyle choices. These averages are collected through surveys and statistical models, providing a snapshot of typical consumer spending across the nation.
In what ways does the HEM benchmark influence loan applications?
Banks and lenders refer to the HEM benchmark to estimate your living expenses when processing loan applications. It impacts the amount you can borrow by providing a conservative figure for your regular expenses, ensuring you have the means to service your loan.
What does the HEM table indicate in financial assessments?
In financial assessments, a HEM table categorises living expenses into essentials, discretionary needs, and luxury items. This classification helps financial advisors and lending institutions understand where your income is spent and assess the risk associated with lending to you.
