Australia’s median wealth per adult at USD194,000 is the highest in the world, according to the Credit Suisse Global Wealth Report 2012. Average wealth per adult, at USD355,000, is second only to Switzerland.
It wasn’t that long ago, in fact the late 1990’s, that Australia was seen as a potential laggard in terms of growth of household wealth, given our relative disadvantages in the then “hot” fields of technology and telecommunications. We were seen very much as an “old economy”. The subsequent experience is a classic reminder of the dangers/futility of naïve extrapolation and long range forecasting.
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An examination of longer term trends in the growth and composition of household wealth reveals the extraordinary growth in Australia’s household wealth relative to the USA that has occurred since the early 2000’s. But it also reinforces some national financial planning issues, particularly our previously discussed comparatively high real estate values. A comparison with the aggregate balance sheets of US households, commonly perceived as in disarray, provides food for thought.
Rising housing values drive Australian household wealth
The chart below reveals real (i.e. after inflation) growth in both Australian and US aggregate household wealth, in local currency terms, from June 1988 to June 2012.
It shows that household wealth grew almost exactly the same amount in both countries for the 12 years to June 2000, with a very sharp divergence from June 2000 onwards. Australia’s household wealth both grew more quickly after 2000 and fell less in response to the global financial crisis than the US: as at June 2012, Australian real household wealth was 7.5% below its 2007 peak, while for the US the decline was 15.8%.
The household wealth divergence is even sharper when Australian real household wealth is calculated in USD terms, as revealed in the chart below:
Because of the strength of the AUD, Australian household wealth in USD terms is even higher than it was prior to the GFC! Since December 2002, Australian household wealth has grown at a rate of 10.1% p.a. to June 2012 compared with the sluggish US rate of 1.8%. It’s little wonder that the US is a popular holiday destination for Australians.
But most of this large rise in Australian household wealth compared with the USA reflects the relentless rise in the real value of Australian dwellings over the entire period under examination, as revealed in the chart below:
Not only did the value of Australian households’ dwellings rise consistenly relative to the US (in local currency) over the entire period, but the maximum decline so far of 8.8% from a much higher peak (in March 2010) is modest compared with the 35.3% fall in the US.
Since June 2002, the value of Australian’s dwellings, in USD terms, has grown almost three times – a real growth rate of 11.3% a year. That of US households has fallen 3.9% i.e. negative real growth of 0.4% p.a. Relatively, for US purchasers, our housing is three times more expensive than it was 10 years ago!
These massive movements in the relativity of dwelling values of Australia compared with the USA does raise questions regarding the sustainability of Australian housing prices, particularly when the much more modest US growth experience in the years immediately prior to 2007 was, with the benefit of hindsight, regarded as a massive “bubble”.
In addition, as revealed in the chart below, dwellings as a percentage of total household wealth have been a high and growing percentage in Australia compared with a much lower and more level trend percentage in the USA.
The flip-side of dwellings comprising a high percentage of household wealth is that Net Financial Assets (i.e. financial assets less total liabilities) are a relatively low percentage, compared with the USA, as shown below:
While difficult to draw conclusions from such highly aggregated data, a decline in the percentage of wealth allocated to liquid financial assets doesn’t appear consistent with an increasing number of baby boomers making adequate preparations for retiring or working less and living off accumulated savings. The US appears much better positioned than Australia.
An implication may be that there will be growing pressure to convert “excessive” housing wealth to a more liquid form. The question is who will be able to afford to buy at current valuations. Our analysis suggests certainly not Americans, nor younger Australians.
Are imbalances in Australian household wealth sustainable?
While gains in Australia’s real household wealth over the past 10 years have been impressive, particularly in view of the GFC, much of these gains reflects an increase in the real value of our stock of dwellings. With dwellings now comprising 70.1% of household wealth compared with 30.4% in the USA, it could be argued that we have bid up housing prices to levels that may not be sustainable (at least as a % of wealth).
At an individual level, particular for somebody close to or in retirement, we would regard holding 70% of your wealth in illiquid, concentrated housing as very risky. It is highly likely that you will be forced to sell or “liquefy” (e.g. take out a reverse mortgage) to fund ongoing living expenses, leaving you exposed to market risk on what is for most people their major individual asset/s, at a time when there is no capacity to recover from a poor outcome.
As pleasing as it is for Australia to rank highly on international measures of household wealth, a better “balanced” national portfolio with less reliance on housing and more on financial asset wealth would be preferred.
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Wealth Foundations (ABN 95 965 896 114) is a corporate authorised representative of Wealth Leadership Services Pty Ltd (Corporate Authorised Representative No. 319641). Wealth Leadership Services Pty Limited (ABN 36 121 535 993) is a licensed Australian financial services firm (AFS Licence No. 317369).
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