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Australian wealth drops, lower rates to have mixed impact

Nicki Bourlioufas  |  13 Jul 2016Text size  Decrease  Increase  |  

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Australian household wealth dropped in the March 2016 quarter, as returns from shares and property fell, but lower interest rates could help wealth creation over the longer term by fuelling further gains in residential property values, where most household wealth is held.

As at the end of the March quarter 2016, Australian household net worth fell to $8.64 trillion, down from $8.65 trillion in the December 2015 quarter, according to new data from the Australian Bureau of Statistics (ABS).

Net Australian household worth was largely held in property, accounting for $5.90 trillion of wealth or around 68 per cent, while $4.31 trillion was held in financial assets such as cash, terms deposits, shares and superannuation. Household liabilities amounted to $2.23 trillion.

"The largest component of household wealth is property, which has benefited from favourable tax treatment, low borrowing costs, freely available housing finance and excess demand," says James Alexander, co-head of global fixed income and head of Australian fixed income, Nikko Asset Management Australia.

"For most Australians, property has been the main path to building household wealth over the last 20 years."

However, during the quarter, household net worth fell $13.2 billion, its first decrease since the September quarter 2011.

Households recorded losses of $2.2 billion for property, their second consecutive quarterly loss, following losses of $8.0 billion in the December quarter.

According to Savanth Sebastian, an economist with CommSec, household wealth is likely to see more volatility in coming months with share and property market gains less likely.

However, lower interest rates will help Australians over the medium to longer term as lower rates will likely fuel further gains in property values, which will offset lower returns form cash investments.

"Lower interest rates may help to lift household net wealth creation, because they fuel gains in other asset classes such as residential property," Sebastian says.

"Having said that, there is some risk to household wealth over the next few quarters from the property market. Property prices have had their run and we also believe that an emerging oversupply in unit markets in the capital cities could dent returns."

"We expect greater share market volatility, which may crimp household wealth over the short to medium term, with the Brexit volte adding to the volatility that we have seen in the share market this year.

"That may affect superannuation balances and therefore household net wealth."

In terms of which groups would be most affected by lower rates and wealth creation, Nikko's Alexander said: "If we consider different demographics across the Australian population, then some segments will be disadvantaged by the current dynamic of low rates and high property prices."

"Young people who can't afford to enter the property market and older people relying on savings are not likely to be content with the current situation and will struggle to build wealth."

Mark McCrindle, principal of research firm McCrindle, said middle income earners would benefit most.

"The greatest benefits will be felt in the middle income groups where the bulk of household wealth is held in the family home, and many people in this group have a mortgage, so they will benefit from lower interest costs," he says.

"Lower interest rates will also help lower income groups, who tend to be younger people, because it may enable them to get into the property market and buy a home. This group has been left behind in wealth generation because many don't own property.

"But lower rates will help to counter this because rate cuts can have a greater financial impact than salary increases, because the decline in interest costs on a mortgage can far outweigh the value of salary increases given growth has been so low."

The mortgage debt to residential property ratio rose to 28.6 per cent in the March quarter from 28.2 per cent in December quarter 2015, indicating that mortgage debt grew faster than the value of residential real estate owned by households, the ABS said.

McCrindle says while Generation Y had an average household net worth of $268,800 as at 30 June 2014, it was less than half that of the Generation Xers who are just a decade older.

"The highest net worth generation in Australia are the Boomers aged 55-64 who not only have a net wealth almost five times that of the generation of their children (Generation Y) but they still have a decade or more of earnings and wealth accumulating ahead of them," he says.

"While Generation Y have seen a wealth increase of 9 per cent since 2012 ($21,647), the mid 50s Boomers have seen a 14 per cent wealth increase ($153,335) with their wealth rising since 2012 from $1,086,365 to $1,239,700 (to 30 June 2014).

"Therefore, not only does the average Australian household aged over 55 have a net worth exceeding $1 million, but, due largely to rising property prices over the last few years, it is also seeing the fastest wealth increases."

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Nicki Bourlioufas is a Morningstar contributor.

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