Yahoo Finance 'Very rosy': Despite pandemic, Aussies are wealthier than ever
Despite a deep recession, chronically weak wages, a 20 year high in the unemployment and underemployment rates, Australians are accumulating strong gains in wealth.
Australians are amongst the wealthiest people in the world and while there was a hiccup in the growth in that wealth with the recession, stock market slump and fall in house prices in 2020, things are, all of a sudden, rosy.
Very rosy.
The gains in wealth over the latter part of 2020 and the very early part of 2021 have been evident in the strong rebound in the ASX and recovery in house prices.
Dwellings and stocks are the asset classes where the majority of wealth is held by Australians. This means that the housing cycle and stock market trends are vitally important in determining the wealth of householders.
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Official data on wealth is available only up to the end of September 2020. At that time, the level of wealth in housing was just over 500 per cent of annual household disposable income, while for financial assets (stocks and deposits and other investments) was around 420 per cent of income.
In gross terms, household wealth was around 920 per cent of household income.
This was just below the record peak in the December quarter 2019.
Wealth to reach record high
When the December quarter data are released in around 6 weeks, they will show a surge in wealth. The ASX is up around 14 per cent since the end of September while house prices are up close to 2 per cent.
Wealth is likely to exceed the end of 2019 level and reach a new record high.
This is important because of the link between the change in wealth and consumer spending.
The wealthier Australians are, the more likely they are to ramp up their spending and with that, it drives a faster rate of economic growth and job creation.
It makes sense. Even if you don’t cash-out the extra value in your house or superannuation account for obvious reasons, the fact that you are wealthier with sustained increases in house and stock prices, the research shows people are less inclined to save and more inclined to borrow against those higher value assets.
Changes in wealth are a vital mechanism in determining broader longer-run trends in household spending and therefore the overall health of the economy.
What about household debt?
In recent times, considerable attention has been devoted to the growth in household wealth.
To be sure, the facts show that household debt in Australia is amongst the highest in the world having risen from around 80 per cent of household disposable income in the early 1900s to around 185 per cent today.
What is often ignored or overlooked in the discussion of household debt, is that this has occurred in concert with housing wealth rising from less than 300 per cent of income to over 500 per cent, and financial assets rising from 220 per cent of income to over 400 per cent.
That accumulation of household debt has been put to good use to the point where overall net wealth (assets minus debt) has risen from under 500 per cent of income in the 1990s to around 775 per cent of income.
In other words, the focus on household debt is a simple and wrong approach to look at household finance – the other side of the balance sheet – assets – have been rising much more quickly than debt.
Wealth is not evenly shared
Of course, the growth in wealth is not evenly shared. There are still many Australians in financial hardship with little or no wealth.
This is largely a problem with the tax system which through negative gearing, superannuation concessions, generous treatment of capital gains, among others, favours those with high incomes and already accumulated wealth to add to their assets.
Efforts to address the unfairness in the tax system have proven difficult. The Labor Party unexpectedly lost the 2019 election on a platform of tax reform.
If the current rebound in wealth continues over the next few years, it will be great news for the economy as it will encourage consumers to spend and borrow and in the process, underpin job creation.
But it will lead to questions of fairness and equity which will require policy leadership to address.
With the next Federal election a year or less away, it is possible that tax reform will be on the agenda, but with Labor’s defeat in 2019, don’t expect there to be a program of major reform.
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