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Aussie wealth jumps to record, higher rates to erode some gains
Australians are the richest they have ever been, with wealth pushed up by rising property and shares values to a record $14.9 trillion in the March quarter of 2022, while wealth per capita surged to a record high of $574,807, according to data from the Australian Bureau of Statistics (ABS).
However, economists warn that wealth levels may dip in coming quarters as interest rates march higher. But this will open opportunities to investors to buy property at lower price levels, particularly those younger Australians who missed out on the recent boom in household wealth.
Average (per capita) household wealth rose by $3,695 or 0.6 per cent, in the March quarter to strike a record high of $574,807 per person. Wealth per capita is up 16.8 per cent over the year. Since the March quarter 2020, household wealth has increased 35.3 per cent, the ABS said.
Not surprisingly, residential property accounted for most of the growth in household wealth since the start of the pandemic, rising 39.9 per cent. Superannuation balances increased 22.5 per cent as share markets were supported by low interest rates, the ABS said.
Of total household wealth, property assets ($10.2 trillion) accounted for the bulk of wealth, easily outstripping the record $1.2 trillion held in shares, $1.5 trillion in cash deposits and $3.7 trillion in superannuation assets, ABS data show. According to CommSec, listed shareholdings accounted for 18.2 per cent of all financial assets in the quarter, below the 19.6 per cent average since the global financial crisis as well as the long-run average of 22.1 per cent. Foreign investors hold a record $920.9 billion of Aussie shares, 34 per cent of the total.
Falls in wealth likely to come with property weakness
However, moving ahead, higher interest rates are expected to erode household wealth, particularly as higher interest rates cause house prices to fall in the capital cities.
“Falls in home prices and shares should see wealth ease in the September and December quarters,” says CommSec chief economist Craig James. “Lower home prices [will be] the main reason and largely in the September quarter,” he predicts. “Home prices have started to ease, especially in Sydney and Melbourne. And share prices have eased sharply in the June quarter with the S&P/ASX 200 index down by around 13 per cent.”
Stephen Miller, an adviser to GSFM Funds Management, agrees. “I do think it is inevitable that wealth levels will fall in the second and third quarter of this year. That they are at record highs reflects the historically high levels of monetary stimulus applied by all developed country central banks, including the Reserve Bank of Australia.
“Higher interest rates will inevitably take some of the steam out of the housing market and the prices of financial assets such as equities. Indeed, they have already,” says Miller.
But he doesn’t think that is a totally bad thing, with gains in wealth since the pandemic largely accruing to wealthier households who own a greater proportion of their wealth in shares and property.
“In this way extraordinary stimulus probably exacerbated some wealth inequality and, in some cases, put residential real estate beyond the reach of the younger, less wealthy cohort. That cohort may even welcome any price decline in housing,” says Miller.
Superannuation balances to take a hit also
Along with falling property prices, superannuation balances are expected to be hit in the 2021-22 fiscal year.
“Reflecting the sharp falls in share markets and in fixed interest investments … balanced growth superannuation funds are down by 5 per cent or so for this financial year to date and are on track for their first financial year loss since 2019-20 (due to the pandemic) and their worst financial-year loss since the GFC,” says Dr Shane Oliver, chief economist with AMP Investments.
But again, this isn’t necessarily bad, says Oliver. “When shares fall, they’re cheaper and offer higher long-term return prospects. So, the key is to look for the opportunities that pullbacks provide. It’s impossible to time the bottom but one way to do it is to ‘average-in’ over time.
“Fortunately, the Australian superannuation system does just that by regularly putting money into shares for workers (via their super) effectively taking advantage of the fact they are cheaper,” says Oliver.
In the US, household wealth has begun to dip from record levels. US household wealth declined for the first time in two years in the first quarter of 2022 as a drop in the stock market overwhelmed continued gains in home values, US Federal Reserve data shows. Household net worth fell to US$149.3 trillion in the first quarter of 2022, down from a record US$149.8 trillion at the end of last year. The drop was driven by a US$3 trillion fall in the value of equities, a plunge that has worsened in the June quarter.
