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Australian wealth hits fresh highs

Nicki Bourlioufas  |  06 Jan 2017Text size  Decrease  Increase  |  

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Household wealth has hit record levels for several quarters now but some analysts warn that households are too highly leveraged and that house values could correct over the medium term.

 

Australian wealth topped fresh levels in the September 2016 quarter, with most wealth held in property, but a rise in the share market also helped to propel household net wealth higher.

However, some analysts are warning households are too highly leveraged and house values could correct over the medium term.

As at the end of September quarter 2016, household net worth rose to $9.06 trillion from $8.86 trillion in the June 2016 quarter, according to data from the Australian Bureau of Statistics (ABS).

Almost 70 per cent of net Australian household worth was made up predominantly of $6.14 trillion of property assets and $4.57 trillion of financial assets such as cash, terms deposits and shares. Household liabilities amounted to $2.27 trillion.

Household residential property assets alone amounted to $5.84 trillion in the September quarter, up a whopping $107 billion or 1.9 per cent from the June quarter 2016.

Australian household wealth has hit record levels for several quarters now, due largely to rising property prices over the last few years.

The share market also rose $76.5 billion in value, up 4.7 per cent in the September quarter from the previous quarter. Bank shares jumped in value by $21.5 billion, following two consecutive quarters of valuation decreases, the ABS said.
 
But household debt levels are gradually rising, making households vulnerable to any medium-term rise in interest rates. The mortgage debt to residential property ratio fell to 27.5 per cent in September quarter 2016, down 0.1 per cent from the June quarter.

But household debt levels have gradually risen over the past 20 years, with the mortgage debt to residential property ratio rising to as high as 30 per cent in recent years, up from around 18 per cent in September 1996.

The interest payable to income ratio has stabilised from March quarter 2010 onwards, displaying a gradual downward trend. The ratio fell to 9.9 per cent in the September quarter from the June quarter ratio of 10.9 per cent, the ABS said.

The interest payable to income ratio represents the proportion of household gross disposable income that is required to meet interest payments, while the mortgage debt to residential property ratio shows the extent to which household residential real estate assets are geared.

According to wealth management firm Prime Financial Group, a separate ratio reflecting debt serviceability, the household debt to income ratio, remains very high in historical terms and compared to other countries.

"Households have gorged on debt, and debt-to-income levels are now at 135 per cent or twice what they were in 2000 ... Where the GFC caused American households to de-risk and save, Australian households gorged on cheap debt," Prime said in a research paper published in December.

Despite record low interest rates, a significant household wealth effect from rising house prices, and the benefits of a 30 per cent fall in the Australian dollar over the last three years, Australia's economy is struggling, Prime said.

"The outlook for Australia's economy in 2017 is poor. We fully expect interest rates to remain on hold or lower in 2017, and we expect Australia's currency to fall into the mid 60 cent levels," Prime said.

"We feel mortgage bank share prices are fully valued here and we think the impact of rising funding costs will crimp profitability and bring pressure on household cash flows.

"We continue to advocate for higher-than-normal cash weights, increased offshore equity exposure by way of international fund managers and domestic companies exposed to a falling Australian dollar."

Separately, house values may also correct with any economic downturn, which could dent household net wealth over the medium term, said Louis Christopher, managing director of SQM Research.

"The housing market is currently at its second most overvalued point on record and now, given a combination of factors including loose monetary policy, strong population growth and booming local economies, prices in Sydney and Melbourne will be rising from this very lofty valuation point," Christopher said.

"The end of 2017 will see both Sydney and Melbourne markets dangerously overvalued and paving the way for a possible correction in 2018."

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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