The ABS released its Finance and Wealth data to support the Q3 National Accounts which showed that household wealth increased to new highs at $7,719 billion in September 2014, an interesting contrast to the “technical income recession” reported relating to Australia’s rapidly declining terms of trade.
The main components of household balance sheets were land and dwellings ($5,286 billion) and financial assets ($3,865 billion), offset by household liabilities of $2,049 billion.
Household net worth increased by $122 billion in Q3 2014 to claim a new record, pushed forward by gains in both land and dwellings ($77 billion) and financial assets ($15 billion).
Financial assets saw a large increase in deposits and some gains in superannuation in the quarter, offset by a net sale of equities in Q3.
Drivers of Gains 1994-2014
Since 1994 household wealth has increased at an average quarterly rate of 1.9 percent.
The rate of growth was much quicker at 2.7 percent in the 8 years leading up the financial crisis correction.
Previously the rate had been increasing at a much more sedate at 1.8 percent per annum in the years 1994-2000.
The impact of compulsory superannuation from 1992 is clearly visible which forced households to effectively invest for the future via pension contributions, largely into equities.
A number of privatisations of large government enterprises also led household equities ownership to become more widespread.
Unsurprisingly the average household balance sheet remains skewed towards residential real estate.
The chart presented above shows how residential land and dwellings have driven household wealth higher since the official cash interest rate began to decline from the nosebleed level of 17.50 percent in January 1990 to just 2.50 percent today.
As noted by the ABS commentary the gains in household equity have been driven disproportionately by capital city housing rather than dwellings in regional Australia:
“The value of residential land and dwelling assets mirrored the growth in net worth over these years due to an increase in housing prices, particularly in the capital cities.”
Debt to Assets
Our analysis of the Q3 National Accounts has previously shown the increase in interest payable driven by greater mortgage debt over the decades.
It is worth noting that one would indeed expect total interest payable in aggregate to increase with a population expanding at 350,000+ per annum and an inflation target of 2-3 percent.
The independently produced ABS figures show that the interest payable to income ratio has dropped to its lowest level in more than a decade thanks to prevailing low interest rates.
The interest payable to income ratio was 16.4 percent in June 2008 but has since dived all the way down to just 10.3 percent, a decline of more than a third or 37 percent.
This represents an significant and fortuitous affordability dividend for existing homeowners, a point often deliberately overlooked by some market commentators.
Mortgage Debt to Land & Dwellings
The Reserve Bank of Australia’s data and research has consistently shown elevated household savings ratios in recent years.
The Reserve’s conclusions have also suggested that most mortgage balances are well ahead in terms of repayments – up to 15 percent or 24 months ahead on average, which is an enormous buffer.
If that is indeed the case then theoretically mortgage debt as a percentage of property assets should have declined noticeably since 2012 when mortgage debt to residential property land and dwelling assets peaked at 30.6 percent.
The ABS figures support this to some extent with the ratio declining to 29 percent as at Q3 2014
Overall it was another strong quarter with household wealth continuing to rise inexorably towards $8,000 billion.
This has more than compensated for losses caused by the share price correction during the financial crisis which took household net worth down from $5,898 billion in December 2007 to $5,107 billion in March 2009.
The decline in household wealth from peak to trough was 13 percent, but both equities and real estate valuations have bounced since that time
Interestingly since March 2009 total household wealth has leapt by more than 51 percent in absolute terms which is great news for Australian household balance sheets.
It is particularly pleasing to note that the household debt to assets ratio has not increased since December 2008.