Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Monday, 22 December 2014

Record Household Wealth in 2014

Record Household Wealth in Q3 2014

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

The ratio of household debt to assets reached a peak in March 2009 but has since declined from 22.1 percent to 21.0 percent. 

Interest Payable

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.

There is also the impact of foreign investment capital to take into account here, which is not quantifiable at the present time.

The Wrap

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.