Growth in household wealth is booming. This is no surprise given house prices and the stock market have surged to record highs with the gains overwhelming what is in comparison a tiny level of household debt.
Importantly, Australians have never been wealthier.
While there are important issues associated with the distribution of that wealth which can and arguably should be addressed through the tax system, the rise in wealth bodes well for consumer spending over the medium term.
This means that when the current round of lockdowns come to an end and 80 per cent or more of the population is vaccinated, consumer spending will lift.
There is a vast array of research, including from the Reserve Bank of Australia, that shows a rise in householder wealth is associated with stronger growth in consumer spending.
It should be noted the reverse is also true – when wealth is falling, growth in consumer spending falls.
And this makes sense.
For many people, when their financial position (wealth) jumps because their superannuation balance has grown strongly and the value of their house is, for example, at least 50 per cent higher than it was a decade ago, they will choose to save less of their current income and spend it.
They may even borrow more, using their strong net equity position as collateral. Hence the rise in growth of consumer demand.
Which makes the current surge in wealth a critical issue in the outlook for the economy.
The latest data on wealth relates to the end of the March quarter 2021 and shows that total household wealth in dwelling ownership rose to around 575 per cent of annual disposable household income.
This is a record high, and up from around 300 per cent in the mid-1990s.
At the same time, wealth in financial assets – things like superannuation balances, bank deposits or direct shareholdings – rose to 425 per cent of annual household income. Again, this is a record high.
Household debt, or liabilities, was broadly steady at around 180 per cent of annual household disposable income.
Calculating net household wealth
Net household wealth is calculated in a simple way. It is:
- Dwelling assets plus financial assets minus liabilities equals net wealth.
In the chart below, this is the pink line plus the green line minus the blue line equals the orange line.
This means net wealth of household sector is around 825 per cent of annual income – a record high. This is nearly double the level of net wealth from the mid 1990s.
It is important to note that there has been a further increase in wealth in the June quarter (official data released in early September) as house prices and the stock market rose further. Debt was little changed.
While it is clear there will be a sharp fall in GDP and a sharp rise in unemployment in the September quarter as the widespread lockdowns hit economic activity, there remains grounds for optimism for the economy when the lockdowns end.
What is ahead for the economy?
When 2021 draws to an end and 2022 kicks off, it is likely that a significant proportion of the population will be vaccinated for COVID-19, lockdowns will as a result be rare and the economy will be rebounding. Perhaps strongly.
It is also likely that household wealth will be at new record highs, even if there is a stabilisation in house price growth and the stock market.
Consumers will have increasing optimism to go with their record wealth.
Right now, the economy and much of society is glum. We are effectively in a second recession in two years. GDP is in sharp decline, businesses are failing and the unemployment rate is poised to jump.
But there is some light at the end of the tunnel which is linked to the extraordinary rise in household wealth, aided in part by low interest rates and easy monetary policy.
If this level of wealth is maintained over the next 6 to 12 months, it bodes well for an economic recovery in 2022.