Millions of Australian households have enjoyed a massive increase in their wealth, with the average wealth per household increasing to well beyond $1M.
Net wealth up 20% with an unprecedented increase in house prices
The latest Australian Bureau of Statistics figures showed total net wealth increasing by $735 billion of 6 per cent to a record high of $13.4 trillion in the June quarter, which averages out to around $522,000 per capita.
That’s a dramatic 20 per cent increase from a year earlier, driven by property prices and a stock market rebound.
The ‘haves’ and the ‘have nots’
Australian households are now among the wealthiest globally, and that’s largely founded upon the strength of the property market. The value of the dwelling stock is now estimated to be around $9 trillion, even accounting for housing debt approaching $2 trillion, which means that over half of Australian net worth is comprised of property market equity.
However, the wealth is not distributed evenly, and there are many households with substantially lower wealth. The vast majority of these households do not own a property and have struggled to set a foot on the property ladder.
These results have reflected the financialisation of the housing market and its impact on household wealth, often with generational implications, as the ‘bank of mum and dad’ is effectively the fifth-largest ledger in the country.
A quarter of a century ago, above 40 per cent of the credit in the system was housing credit, but today that figure is above 60 per cent.
Entrepreneurs and small business owners often secure business loans using their homes as collateral, so the housing market has effectively become too big to be allowed to fail.
The good news is that gearing ratios have increased unduly, and mortgage repayments have generally become more comfortable as mortgage rates have declined.
Sharp increase in investor activity
Unsurprisingly, a sharp increase in investor activity is highly likely to continue, as, with ultra-low interest rates, the out-of-pocket expenses are very low. As a result, more property investors are expected to come into the market in 2022, with the cycle to date being driven by first homebuyers and upgraders.
Investors are looking for a return on their capital, with the cash rate likely to remain at 0.10 per cent for the next few years; it is expected that property will feature in their plans.
Households have also built up a vast war chest of excess savings through the pandemic period.
Despite the increase in property prices, we do not see the market as being in bubble territory. Some parts of the property market are at risk of overheating, especially in some of the coastal lifestyle locations around the country, but overall mortgage serviceability is at very favourable levels at the moment.
Six years ago, the American economist Scott Sumner said he believed endless bubble claims and predictions would characterise the 21st century due to a lack of understanding of the impact of low real interest rates.
And that is what has played out since.
There have been predictions of housing bubbles and crunches in markets like Canada, Australia, and New Zealand for years, but they haven’t come to fruition.
Low stock levels and buying intrastate (or interstate)
Stock levels have reduced significantly, with demand substantially exceeding supply, particularly for high-quality freestanding houses.
Another challenge that buyers face is purchasing in areas that they are not familiar with, particularly for those who move intrastate to make a ‘sea-change’ or ‘tree change’ move.