Private wealth in Australia is heavily concentrated in property in a grand lack of diversification that highlights how vulnerable the economy is to higher interest rates, a new set of figures has found.
The superannuation market is worth a bit over $1.84 trillion, the fourth-largest pension pool in the world. But actuarial firm Rice Warner points out that it is dwarfed by the private investment market, meaning assets outside super and excluding the family home, worth another $2.49 trillion.
Almost half the total, or $1.19 trillion, represents directly held property, net of debt.
Fuelled by a raft of tax breaks such as negative gearing and the capital gains discount, directly held property investments alone are worth about 65 per cent of superannuation assets.
Rice Warner’s figures suggest that Australian investors are doubling down on their exposure to low official rates – first through the value of the property market, and second through bank shares, which nearly every superannuation account holder owns.
“A high proportion of private wealth is dependent on the value of property which, in turn, is dependent on the current low interest rates,” says Rice Warner senior consultant Alun Stevens.
“This risk is correlated to other wealth, mainly the family home, but also to investments in bank shares which are themselves dependent on profits from property investments,” he says.
The national love affair with property, or at least for those over a certain age who can afford current high prices, has ratcheted up the economic risks in the event of a long period of flat housing prices or, if economic reality sets in, softer house prices.
While the Reserve Bank is happy to sit with official rates at record lows, the crackdown by big lenders on investor loans suggests the pain may be felt widely, and soon.
The age group with the greatest volume of private assets outside the family home is the 55-64 year old bracket, but not far behind is the cohort just younger and older than the prime baby boomers.
Source: Rice Warner
Even though the superannuation and wealth management industries make up a significant part of the broader economy, Rice Warner notes the dollar value of super assets is challenged “quite starkly” by the importance of residential property in the wealth of (older) Australians.
This concentration of wealth will only be exacerbated if the preference for property within the SMSF sector continues to grow, Stevens says.
With the understatement you might expect from an actuarial type, he adds that if this undiversified portfolio ever falters, “we are undoubtedly in for interesting times”.
The figures underscore why the Reserve Bank is concerned negative gearing is encouraging speculation in property and has called for a review of the capital gains tax discount. The central bank’s view has been echoed by many senior business leaders including the head of the government’s audit commission and the chairman of the Financial System Inquiry.
Even though the Murray inquiry concluded negative gearing and capital gains concessions pose a systemic risk, and the tax discussion paper found they cause distortions in the economy, the government has baulked at reform.
When senior officials from the Reserve Bank front up at the parliamentary inquiry into home ownership hearings in Sydney today, it will be interesting to hear if they draw any economic conclusions from the lop-sided concentration of wealth in property.