Strong House Prices Boost Household Wealth

Strong House Prices Boost Household Wealth

Rising house prices outpaced increases in net debt to deliver a 14.8 per cent increase in net household wealth during the year ending 30 September.

The Spicers Household Savings Indicators show that net household wealth increased by 2.2 per cent in the September quarter from the June quarter.

Spicers’ chief economic adviser, Rozanna Wozniak, says that the last 12-18 months has been a boom time for households. On average, net wealth per household increased by $28,000 in the last year alone. In fact, these gains have been heavily biased towards owners of residential property.

“Thanks to rapid house price growth, homeowners have been amply rewarded by their ‘borrow and spend’ strategy,” Rozanna Wozniak says.

However, the report also hides several worrying trends.

Household debt, in percentage terms, is now increasing faster than the rate of growth in asset values. House price growth has slowed significantly, yet households’ appetite for debt has been slow to respond.

Furthermore, household incomes have not kept pace with growth in debt servicing commitments. The combination of higher debt levels and higher interest rates are squeezing households’ cashflows.

“In fact, some households are probably already regretting having taken on so much extra debt.”

“With house price growth having slowed significantly, the rewards that are able to be reaped from this ‘borrow and spend’ strategy will be much more difficult to find over the next couple of years.”

Gains in net worth are expected to become progressively smaller during the coming year. In fact, many organisations, including the Reserve Bank, are projecting a modest decline in house prices during 2005. If these projections eventuate, it is possible that household net worth will edge lower next year.

The slowdown in house price growth is already evident in the Spicers Household Savings Indicators. Prices rose by 7.5 per cent in the September 2003 quarter but the rate of increase had fallen to 2.4 per cent by September 2004.

Financial net worth, which excludes both the value of the housing stock and mortgages, increased by 4.2% during the year compared to the 14.8% growth experienced in total net worth.

The differing rates of growth in financial net worth and total net worth highlight the important influence of house prices on household balance sheets. Financial net worth increased $4.3 billion during the year to September. In comparison, the value of the housing stock increased by $9.7 billion during the September quarter alone.

In terms of holdings of financial assets, bank deposits increased $2.9 billion during the year and direct sharemarket holdings increased $1.7 billion. Inflows of $500 million into managed funds were influenced by an outflow from superannuation funds of $400 million.

“It has been a great year for homeowners, but it is now time for households to show more restraint. The pace of debt accumulation remains strong even though house price growth has already slowed significantly. In the meantime, income growth has not kept pace with debt service commitments.

The boom times are coming to an end. It would be unwise for households to keep borrowing on the basis that recent wealth gains will continue indefinitely.”

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