The Household Expenditure Measure (HEM)

Developed and published as a quarterly report by economic research group the Melbourne Institute, the Household Expenditure Measure is essentially a figure that represents the median spend different types of households outlay on what are considered ‘basic’ expenses, as opposed to their total living costs.¹

Banks and lenders use the HEM as a benchmark to get a picture of how much money mortgage applicants are spending compared to other borrowers in similar demographics and income brackets.

The HEM uses local survey data linked to the Consumer Price Index (CPI) as well as over 600 items from the Australian Bureau of Statistics’ (ABS) Household Expenditure Survey, categorising them as:

• ‘Absolute basics’, including essentials like most food items, children’s clothing, utilities, transport costs and communications.
• ‘Discretionary basics’, which covers non-essential but fairly ‘everyday’ costs like take-away food, restaurants, confectionery, alcohol and tobacco, clothing, childcare and entertainment.
• ‘Non-basics’, which covers luxuries like overseas holidays and gardening services.

The HEM is assessed against eight different household types, based on factors including relationship status and number of dependants. The eight household types are:

• Single households without children
• Couple households without children
• Single households with one child
• Couple households with one child
• Single households with two children
• Couple households with two children
• Single households with three children
• Couple households with three children.

The HEM forms part of lenders’ borrowing power calculations, which they use to determine how big a loan they can responsibly offer to you. By assessing your declared regular expenditure against the relevant HEM benchmark, a lender can generally make an informed estimate of your borrowing power.

The HEM also allows a lender to get a better idea of whether you’re spending more or less per year than other households of the same type. This, in turn, can influence how large a loan the lender can responsibly offer to you. However, it’s worth noting that lenders will typically assess your self-declared expenses against your household type’s HEM and then use the higher of the two values when calculating your borrowing power and home loan serviceability.

Most notably, HEM doesn’t include your housing costs, such as rent or current home loan repayments. While it covers the median spend on absolute basics, it doesn’t include things like:

• Private school fees
• Life insurance
• Sickness and personal accident insurance
• Superannuation
• Alimony or maintenance payments
• Interest repayments on loans
• Lease payments
• HELP.

The HEM also isn’t directly affected by interest rate or cash rate changes. However, a lift in inflation could potentially see the HEM increase due to the uptick in the cost of consumer goods as a result.

The primary difference between the HEM and a living expenses calculator is that the HEM calculation is designed to produce an expenditure benchmark based on statistical data that lenders can judge household spending against. Conversely, a living expenses calculator helps you assess your own expenditure and budget and is specific to your financial situation.

However, just because the two are different doesn’t mean they can’t be used together. Most lenders may ask you to perform a self-assessment using a living expenses calculator or form that they provide, which you’ll fill out with your (typically monthly) expenses.

The lender can then use your self-assessment in conjunction with your proven income (i.e. payslips), bank statements and their HEM calculations to get the most accurate possible understanding of your expenses, and subsequently determine your borrowing capacity.

It’s entirely possible that your real expenses could be quite different to the HEM figure for your type of household. However, lenders can’t and don’t rely on HEM exclusively when assessing your spending habits. They’ll typically also look at your recent expenditure and compare it against the relevant HEM benchmark.

That being said, the lender will typically use whichever of the two is higher when determining your expenditure and borrowing power.

While the HEM is regularly used in the home loan applications and approvals process due to its utility as a benchmark for median expenditure, its nature as a ‘one-size-fits-all’ solution can cause issues. It’s previously come under fire from the Australian Securities and Investments Commission (ASIC), Australia’s financial services regulator, for being too broad-based and having the potential to be misrepresentative.²

For example, the way items are classified for the purposes of HEM calculations can paint a misleading picture of someone’s annual expenditure. Food, take-aways and restaurants are all classified as either absolute or discretionary basics; however, a home loan applicant could have feasibly spent thousands of dollars a year on luxurious groceries and meals, and all of that spending would be painted as part of their ‘necessary’ expenditure.

That being said, however, it’s generally not worth worrying about HEM’s potential shortcomings. Financial institutions and lenders are always working on improving and refining their respective approvals processes, and a lot of that is largely out of the hands of the individual.

What you do have control over is your own finances and expenditure, so your focus should be on making sure your spending and saving behaviours align with the level of prudence that home loan providers look for in a home loan applicant.

Always remember that the HEM isn’t a factor specific to you; rather, it’s a database of indexed values used by lenders to determine your capacity to take on a home loan.

The other factors that typically also form part of the lender assessment may include:

• The loan amount and LVR of the proposed home loan you’ve applied for
• Your credit history
• Your existing debts and assets, and any credit card or loan repayments you’re currently making
• Your long-term spending and saving habits
• Whether you’re a first home buyer
• Whether your property will be owner-occupied or an investment property
• Your income, current employment status and employment history.

So, at the end of the day, your own suitability for a home loan is largely influenced by your own personal circumstances, decisions and actions.

You can’t magically double your income, but living within your means, saving as much as possible, paying down any existing debt and avoiding new debt will all typically go a long way towards setting you up to be approved for a home loan.