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).

4 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 better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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Tuesday, 6 January 2015

Super Returns 7.5 percent in 2014

Super finish to the year

According to SuperRatings the most common superannuation funds held by Australian returned a solid 7.5 percent in the 2014 calendar year.

For the first 8 months of the year all seemed to be on track for a bumper year of returns before a sharp Australian share market correction through the month of September brought equities returns back down to earth with a bump.

However a classic face-saving "Santa Claus rally" turned matters around in December leading to a tidy enough annualised result on an accumulation basis (inclusive of dividends).


Above average super returns in 2014

With stock markets - and asset valuations in general - on the receiving end of quite a beating through the financial crisis average super returns for the past decade have tracked at 6.3 percent per annum.

In this context returns of 7.5 percent represented a reasonably pleasing haul for Australia's superannuation funds in 2014.

Importantly the year's returns came off the back of two years of strong returns for super funds in 2012 and 2013 of 12 percent and 16 percent respectively, contributing to a very substantial rebound in average super fund balances since their 2009 nadir.

As we looked at in more detail here the third quarter data had already helped to push aggregate household wealth in Australia comfortably to record levels in 2014, with more gains now certain to be recorded in the fourth quarter.


Record Household Wealth in Q3 2014

The ABS Finance and Wealth data to support the National Accounts showed that household wealth increased to new highs at $7,719 billion as at September 2014.

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 had 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 the net sale of equities in Q3 - which was clearly evidenced in a depleted share market performance in the month of September itself.

Drivers of Gains 1994-2014

Since 1994 total household wealth in Australia has increased at an impressive average quarterly rate of 1.9 percent.

The quarterly rate of growth was much quicker at an unsustainably punchy 2.7 percent in the 8 years leading up the financial crisis correction.

Previously the rate had been increasing at a more sedate at 1.8 percent per quarter in the years 1994-2000.

The impact of compulsory superannuation guarantee from 1992 - which effectively forced households to invest for the future via pension contributions, largely into equities - has been clearly visible.

A number of privatisations of large government enterprises also led household equities ownership to become more widespread.


The chart presented above also shows how residential land and dwellings have contributes significantly to greater household wealth 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 itself 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

Significantly 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. 




The independently produced ABS figures further showed 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.

The Wrap

The strong finish to the year for share markets is great news for households and appears likely to have helped push aggregate household wealth beyond a record $8,000 billion by the end of 2014.

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 outstanding 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.

With official interest rates stuck at only 2.50 percent and now deemed more than likely to fall further by the end of 2015 investors are likely to be dragged further towards equities and real estate in 2015 while increasingly steering clear of term deposits and fixed interest investments.

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