Avocados and Afterpay

When the link was made between buying avocado on toast and the inability to afford a mortgage, many people pointed out that this was clearly a ridiculous comparison. With rising house prices (the median house price in Sydney is more than $1,000,00 and in Perth, it's around $490,000) even a 5% deposit would mean an awful lot of smashed avocado on artisan bread.

People were quick to point out that the issue wasn't so much that millennials were spending their money on avocado toast specifically, but that they were spending too much of their money on consumer goods and services. But when the pandemic forced a reduction in consumer spending for many people, the impact on the economy was significant. So consumer spending is clearly necessary, not just because we want to enjoy the occasional avocado on toast, but because its impact on the economy is so important that last summer in the UK, the government subsidised people eating out at restaurants to stimulate the industry.

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How do we fund our consumer spending?

Research suggests that millennials are avoiding credit card debt and turning to “Buy Now Pay Later” solutions like Afterpay and Zip It because the lack of interest on purchases makes them a smarter form of credit. But how does this affect our consumer spending, and our financial position in general?

The attraction of BNPL solutions for stores and service providers is that it increases consumer spending – because it gives us the opportunity to spend money now that we don't yet have. In addition, as these products are not regulated in the same way that credit cards are, getting approved  is quick and easy. So we're spending more because the extra money is really easy to get, and we think we're not going to pay interest on it.

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Is BNPL really better than a credit card?

ASIC's review of the BNPL industry showed that 21% of the users surveyed had missed a payment in the last 12 months. While BNPL companies don't usually charge interest, a late payment fee is often incurred instead. So an estimated 21% of those using BNPL products are paying more than the original cost of the item and 47% of those consumers were aged between 18 and 29. Only 37% of those surveyed fell into this age group.

Even worse, 20% of the consumers surveyed had cut back on, or gone without essentials, like meals, and 15% had taken out an additional loan to meet their BNPL payments on time. Of those consumers, 49-50% were between 18 and 29.

What this seems to indicate is that while the BNPL products are marketed as being a responsible way to manage your money, and a viable alternative to credit cards, young people seem to be disproportionately affected by financial hardships resulting from their use.

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Whose responsibility is it?

The government has resisted calls from consumer groups to apply national consumer credit laws to these products. The BNPL companies have welcomed the lack of regulation, stating that self-regulation and a voluntary code of conduct is all that is needed to ensure that consumers are protected.

This means that while there are responsible lending laws around the issuing of credit cards, there aren't any which pertain to BNPL products. There is no requirement on the part of those companies to ensure that you can service the payments before they lend you the money.

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What does this mean for us as consumers?

BNPL solutions, like credit cards, have a place as financial tools we can access and use to make our cashflow work for us better. Ultimately though, whether or not we can use them effectively, without incurring additional financial costs, is a decision we have to make for ourselves. We need to ensure we understand the policies on late payment fees and other penalties, as well as whether or not the payment schedule is going to work within our budget.

Being the expert on your own financial position is the best way to make sure your consumer spending is in line with your goals, and that you can have both the mortgage and the smashed avocado.

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Mortgage or Avocado?

5% deposit of $490,000 = $24,500
5% deposit of $1,000,000 = $50,000
Coffee Club Smashed Avocado on Sourdough = $14
Eating it for breakfast every day for a year = $5,110
Years to save up deposit         = 4.8 for house in Perth
                                                    = 9.8 for house in Sydney

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* The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.

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