Rich are getting rich through property, but is it a house of cards?

Three minute read 

Give yourself a hearty pat on the back, because if you are reading this, you are most likely involved in the property or real estate sector, either as an active participant or as a property owner.

Why the selfie?

Well, because property-related things now make up a third of the Australian economy.

And combined, we employ directly some 1.8 million people or one in every sixth employed person in Australia.

See our two charts below.

Well done you!

And whilst we are charming the snake, isn’t it wonderful to find out that over the past ten years or so, our average net household worth has increased from $475,000 in fiscal 2004 to $892,000 in 2015/16.

I don’t know about you, but I am getting the warm fuzzies.

But that’s enough of the love notes.

Some plain speak, if you will.

1. Net wealth is made up of all sources of income, minus costs, so it includes wages, superannuation, savings and investments. 
   
   And much of this net wealth is held in property.
   Any change in the current status quo – and in particular, a sharp downturn in the property market – would have wider repercussions than merely a reduction in household wealth, given the larger number of people who now work in the building and real estate sector. Revisit chart 2.
2. The top wealthiest quintile (20%) holds 60% of the net wealth, whilst the bottom 20% holds just 1%.
   The lower half of us holds just 12%.
   So, the rich are getting richer and well, it is sucko to the rest.
   There is an NZ election this weekend, with Labour (with support from others) ahead in the polls.
   With gay marriage in plain sight, economic balance and housing affordability are two key issues.
   A strong wind is likely to blow north-east across The Ditch soon.
3. Growth in debt has outpaced income and asset growth over the past decade, and the proportion of households that are over indebted has risen from 21% in 2004 to 29% last financial year. 
   And about half of the nation’s wealthiest households that have a property loan, are over-indebted.
   Being over-indebted means that a household owes at least three times more than it earns in a year.
   And keep in mind that the cost of a variable home loan has more than halved since the early 2000s.
4. In short, over-indebted households are more vulnerable to changing economic circumstances, such as rising interest rates, the loss of a job/less work, rising costs and limited wage growth.
   It doesn’t take an economic shock, just a hiccup or two, to start this jelly wobbling.
5. Most of us know that wage growth sucks.
   Wages grew by just 0.7% in the June quarter and 2.1% year-on-year. Worse still, annual growth in compensation per hour is at its lowest level in almost 25 years. 
6. And when it comes to jobs, and based on a survey that you can trust, Roy Morgan’s work shows that 1.324 million Australians were unemployed (10% of the workforce) in August 2017.
   This is similar to a year ago, however, more Australians are now under-employed than at this time last year. In total, 2.565 million (20%) Australians are either unemployed or under-employed.
   In addition, the increase in part-time jobs - according to Roy Morgan - over the last year (up 535,000 or about 45,000 per month) obscures the loss of full-time jobs (down 373,000, just over 30,000 per month).

We are on FIRE*, but that’s pretty risky when you live in a house of cards.

And that is said without taking into account anything digital, the internet of things or robotics.

*An acronym for the Finance, Insurance and Real Estate industries.
Keen to hear your thoughts

About Michael Matusik Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive