Household assets and debt continue to surge, approaching record levels, with growth relatively broad-based across property and financial assets. Banks continue to finance this growth by borrowing abroad, which leaves the Australian financial system and economy more vulnerable to financial shocks that originate overseas.
Household net worth rose by 2.9 per cent in the March quarter, to be 9.3 per cent higher over the year. Net wealth sits at $8.1 trillion and is currently five times as large as nominal GDP. Nevertheless, as a share of GDP, net wealth remains 18 percentage points below its September 2007 peak.
Growth in the March quarter was driven by financial assets (up 4 per cent in the quarter), while non-financial assets also performed solidly (up 1.7 per cent). Both net equity and shares rose rapidly, while land continues to prop up what has been an otherwise fairly sluggish asset class.
The data allows us to isolate the factors driving the recent surge in property wealth. The bricks and mortar component rose by 4.9 per cent over the year to the March quarter and has fluctuated around that pace since the onset of the global financial crisis. The land component, which tends to be more volatile, rose by 9.7 per cent over the year and is the main reason why prices have surged over the past couple of decades.
Dwelling assets, which include both the land and building components, has actually declined as a share of total household assets but still accounts for over half of household wealth. This partially reflects the volatile nature of property assets over the past decade, as well as the compulsory nature of superannuation.
Deposits remain a fairly popular savings vehicle, despite historically low returns, and shares are showing some signs of recovery. Since the March quarter, property assets have increased further in value, primarily in Sydney and to a lesser extent in Melbourne, while share prices have struggled.
The prominence of deposits in the household balance sheet reflects an ongoing shift that began in the aftermath of the global financial crisis. Households became more cautious, at least initially through necessity, and have remained that way through the years that followed.
The global search for yield is creating bubbles and excessive risk taking across a range of global markets, including those in Australia, but there remains a significant share of households who simply desire the safety of a bank deposit and don’t want the rug pulled from under them.
Nevertheless, we can safely say that the household balance sheet remains highly imbalanced, even if that balance has improved somewhat in recent years. A housing downturn in Australia would disproportionately hurt household finances compared with other advanced economies.
Asset growth of this nature doesn’t happen in a vacuum, it has to be financed somehow. Household liabilities rose to 132 per cent as a share of nominal GDP in the March quarter. Household liabilities have now reached a record high and are up 15 percentage points since net wealth reached its peak in September 2007.
Growth over the past couple of decades has been concentrated in long-term loans, mainly to finance mortgages, although there has been some growth in accounts payable (currently at 12.2 per cent of GDP, up from 5.5 per cent in 1990).
Household debt in Australia is among the highest in the developed world, with the rapid surge in household lending supporting the economy throughout the 1990s and 2000s. It was also a key reason why the Howard government was able to run consistent budget surpluses during the 2000s.
More recently, the Reserve Bank governor Glenn Stevens has questioned whether it is desirable for household debt to push much higher. It certainly appears that households have the capacity to borrow more, since the interest debt burden is relatively low, but if Stevens is correct, any further expansion in household liabilities could bring with it a range of additional financial risks.
As it stands, our major banks are already playing with fire by relying on external borrowing to finance our property market. It remains a sound growth model until the point when foreign banks become concerned about our growth prospects or households wise up to the danger of ever rising mortgage debt.
A further concern is that these external borrowings have been used to increase the price of a non-productive asset class rather than improving the productive capacity of the Australian economy.
Unfortunately, we have wasted the opportunity presented by an unprecedented period of cheap capital by seeking out short-term gains over long-term productivity growth.
Household net wealth may be rising but there are a variety of issues behind the scenes that indicate that the sector is not doing as well as the data indicates. Household assets are a product of excessive lending from the financial sector, which has underpinned rising house prices over the past two decades.
A majority of household wealth is locked into illiquid assets, which means the wealth effect from these assets is relatively tiny and provides minimal support to household spending. Meanwhile, the fact that household net worth is still well below its pre-crisis level should highlight the extent to which the Australian economy is struggling.