Economic development has provided untold opportunities for upward socioeconomic mobility. It’s even spawned a term to describe those who have accumulated wealth quickly and risen through the social ranks: the nouveau riche.
The need to assert and display a status upgrade often drives conspicuous consumption, signalling membership of a higher economic and social class. The nouveau riche are often pejoratively characterised as having something to prove, having limited experience operating as a member of a higher class, and as having yet to fully let go of some of the more baked-in behaviours of their humbler origins.
Upward socioeconomic mobility is a feature of economic growth, but in the ongoing COVID-19 crisis Australia is facing unprecedented economic stagnation. And this follows decades of minimal wage and productivity growth – not to mention persistent secular stagnation since the global financial crisis (GFC).
A sustained deep recession will see significant cohorts of people across the economic spectrum slipping backwards. Many of them, hovering around the thresholds that delineate economic classes, may find themselves effectively joining a relatively lower socio-economic group than the one they currently see themselves belonging to.
Younger generations will no longer be as confident as those before them that they can improve their generational economic standing. Collectively, these cohorts may constitute a “nouveau pauvre” – a “new poor”, who must adjust to a new normal.
The needs and behaviours of the nouveau pauvre consumer
Undoubtedly adjusting to their new circumstances may cause some cognitive dissonance between self-perception and reality. Even at the best of times we see a pull between objective and subjective wealth perceptions among consumers – while there is a correlation, many often inflate or deflate subjective perceptions relative to objective measures of actual wealth. The nouveau pauvre will need to balance a form of self-denial about their perceived loss of status with their new economic reality.
This will likely trigger deep-seated loss-aversion biases and may leave many nouveau pauvre feeling as if they have something to prove – to themselves and the world.
The nouveau pauvre will not just be drawn from the ranks of the middle class but also from those on the thresholds of substantial wealth – especially those in industries directly hit with long-term demand uncertainty.
Self-perceptions of wealth are always anchored in societal reference points – for example, are you the richest or the poorest house on your street? We commonly see in our research that financial security and satisfaction with financial position can cut through absolute levels of wealth, typically dipping down around the thresholds between wealth groups.
The biggest relative dip occurs when someone has around $1 million in investable assets – they are technically high-net-worth individuals (HNWIs), yet not quite established enough to really feel like a bona-fide millionaire, secure in their elevated expectations. Our research consistently finds that the person with the nicest house on the humblest street will be happier than the owner of the humblest house on the nicest street.
While they’re objectively more financially secure than those slipping back at lower socioeconomic levels, this group is likely to feel the burn particularly intensely. Many in this group may also find the foundation of their wealth security taking the biggest hit, driven by disproportionate price drops in highly valued, over-leveraged properties.
Implications for consumer confidence
Money in the bank and job security are the greatest drivers of consumer confidence, but often create an overinflated sense of wealth. In the current environment, rising unemployment (and casualisation of labour) and diminishing emergency household funds will likely erode the longer-term confidence of many consumers. We dutifully spend money, service debt and face life’s uncertainties based on our confidence we will still have a job in six months’ time.
Our latest consumer research suggests that close to half of those who have not returned to pre-COVID-19 spending behaviours say they are fearful of a second pandemic wave and are now choosing to save more instead of spending. They have realised they can do without some of the things they used to spend money on.
For many, a loss of income security is calamitous and edges them towards real economic peril. Debt deferral and delinquencies soar, while discretionary expenditure dives. We will see this trend mirrored in the nouveau pauvre. However, aversion to facing up to a loss of status may drive a strong desire to continue spending (and lending) money – expenditure making them feel (and look) “richer”. They have also come to expect and habitualise more affluent tastes and behaviours that will be hard to immediately turn their back on. This will create further tension for self-identity. Providers who fully understand this balancing act in their messaging and offers are likely to prevail.
The best deal in town
Even so, Reality will drive a shift towards more pragmatic purchasing decisions. They won’t necessarily want to opt for the cheapest option available and will still want to project their affluence but will increasingly require clear articulation of value for hard-earned money and increasingly scarce savings. They will want to make sure they get the best deal, and this will trigger demand for refinancing and switching financial service providers.
The main blocker here is that many consumers understand little about the switching process and perceive cost and hassle as barriers to changing the status quo. The winners will be those providers who can drive awareness of a better deal, simplify complexity for the layman and reduce the effort it takes to switch. However, the commodity of convenience may take a big hit as fewer are willing to pay a premium for it.
Implications for superannuation commitment
Superannuation will be perceived as less important by individuals with modest balances who see their savings eroded by early access, lower income, unemployment, a reduced capacity to contribute voluntarily, and the need to satisfy more pressing short-term needs.
However, as the initial shock recedes, a desire for resilience and focus on the long-term may take root for those for those that have more reliable income.
If I had a dollar for every time I’ve sat in a focus group discussing super and heard someone say “It just doesn’t feel like it’s really my money” or “I wish my money was not locked up, in case I need it for an emergency” – well, I’d probably have my own super saving sorted.
Ironically the early-access scheme may have a deeper psychological impact on consumers. It has made their super savings feel like “real” money that can save them in an emergency. Creating this expectation has its own negative consequences, but it may bridge some of the disconnect often observed between the average super member and their super savings.
The opportunity to engage Australians more directly with their super savings has possibly never been greater.
Implications for insurance uptake
Insurance premiums are already increasing and are expected to increase further while at the same time terms and conditions are being tightened. For the nouveau pauvre, reduced value and affordability perceptions may become a deal breaker and many will rethink their commitment to life and income protection insurance. Combined with growing competing expenditure priorities and the hyper-normalisation of greater levels of accepted ‘risk’ in life is likely to reinforce the trend.
This begs a solution from providers to offer affordable insurance that still does the job. This might suggest a greater role for lower cost pooled insurance options like that provided through superannuation. Over the past year legislative requirements to help protect superannuation members paying excessively for default insurance policies has seen hundreds of thousands of super members eschew their insurance cover or have it automatically cancelled. Ironically, this is leaving many of the most vulnerable with no safety net and a challenging path for providers to reduce costs through volume. Additionally, early release of funds to cover emergency needs is shifting the solution focus while further eroding future financial security.
Implications for property investing
Erosion of income security and a struggling young generation of first home buyers will undoubtedly dampen property market sentiment, drive down prices (disproportionately for those in satellite suburbs and those over median price) and expose over leveraged households.
If things get grim, as they appear to be heading, many property owners heading into negative equity will rethink their commitments and consider cutting their losses. This will only compound the downward spiral in prices. The implications of this are monumental considering the critical pillar property ownership plays in the grand narrative of Australian wealth and financial security.
This suggests that banks, brokers and real estate agents will need to take on more proactive financial counselling roles to help the nouveau pauvre avoid sub optimal lending, selling and purchasing decisions driven by emotion and financial stress. Support in forming sensible debt management plans will be paramount.
The need for (the right) financial guidance
CoreData’s latest consumer research shows that many consumers are seeking to improve their financial decision making but need support to do so. They most commonly say that what they need to strengthen and protect their financial position are:
- Tips and advice from companies I pay regular bills to on how to reduce bills
- A website or other free, accessible resource that explains what financial services and supports are available
- Affordable advice and support from a financial adviser/planner
- An app or similar that lets me start investing very small amounts of money, so I can get started in the share market
- Affordable education to improve my financial literacy
- Mentoring or coaching to help with creating a budget and reducing spending
Feeling richer than you are, or at least being in some form of denial, is likely to make you relatively happier than underestimating your wealth, but a disconnect between subjective and objective assessments of wealth can have long-term negative consequences for risk taking, spending and savings decisions.
Feeling poor might be expected to drive frugality, but in fact it can lead to a greater focus on satisfying shorter-term needs and desires. Research on scarcity suggests feeling poor can influence impulsive purchases and poor financial decisions. Feeling like you have less can also make you feel like you have less to lose.
Either way the nouveau pauvre are going to be facing big decisions and will need support to make them. Just balancing the books won’t do the job. The nouveau pauvre need financial advisers and counsellors who understand money psychology and how to balance the relative importance of objective wealth reality and subjective wealth perceptions.
Importantly, decision-making support will have to be affordable and overcome perceptions of being intimidating or overwhelming. For some this will feel like pulling their pants down, but is an unavoidable reality that must be faced.
The level of uncertainty around future employment and income is resulting in more than just reduced confidence for the nouveau pauvre. Financial stress is demonstrably leading to increased mental health, family relationship and wellbeing issues. This strongly suggests financial service providers need to step up and take a more holistic view and proactive role in supporting consumers – especially those dealing with a shockwave of change in their lives.
The scandals and erosion of consumer trust in the financial services industry over recent years now meets and unprecedented moment of crisis – providing the opportunity for the industry to prove its value and to readdress the prevailing narrative. The redemptive hero’s journey awaits the brave.