The wealth effect

From

Economic perspectives

  • Australian home prices have lifted by almost 11 per cent over the past year, raising concerns about weakening housing affordability. But for the two-thirds of Aussies who either own their homes outright or are paying off a mortgage, higher home prices serve to boost wealth levels.
  • High and rising wealth levels underpin household spending (especially discretionary goods and services) and boost overall economic growth. Wealth levels are being closely monitored by the Reserve Bank.

Rising wealth levels can serve to boost household wealth and business investment, and in turn, economic activity.

What does it mean?

  • In the last quarterly Statement on Monetary Policy from the Reserve Bank (RBA) there were 14 references to the word “wealth” in the 87-page document. In particular, the RBA noted the potential for wealth to drive above-baseline economic forecasts.
    • “Household wealth has increased strongly of late, mostly because housing prices have risen, but also because households accumulated an unusually large amount of additional savings out of income over 2020. If the spending response to increased wealth is stronger than usual, a stronger economic path than the one envisaged in the baseline forecasts would eventuate.”
  • The RBA notes that in this scenario a lift in consumption may, in turn, drive investment higher.
    • In this upside scenario, the unemployment rate declines and wages growth rises at a faster pace than in the baseline scenario. Inflation picks up to around 2¼ per cent by the middle of 2023 and remains on an upward trajectory at that point.”
  • Looking more closely at the “Upside” forecasts, not only would inflation lift to 2¼ per cent, unemployment could fall to as low as 3¾ per cent. Such an outcome would push the RBA closer to lifting rates – some time ahead of the expected timeframe of 2024.
  • In short, wealth is an indicator worth close monitoring.
  • The two key drivers of wealth are prices of homes and equities (sharemarket). But asset prices more generally have been rising in the low interest rate environment, such as the prices of used cars. The closure of foreign borders has also served to boost demand for local assets.
  • Other notable wealth drivers include the strong rebound in the job market – not just employment but the lift in job security (consumer views on unemployment expectations are at decade lows). The strength of Australia’s economic recovery and positive expectations of vaccine take-up are both serving to support the sharemarket. Both the ASX 200 and All Ordinaries indexes hit record highs last week.

Home prices

  • If we focus on the housing market, for eight straight months home prices have risen. The latest results from CoreLogic show that national home prices rose by 2.2 per cent in May to record highs. Compared with a year ago, national prices are up 10.6 per cent – the strongest annual growth in 11 years.
  • Importantly, prices have not just been rising across capital cities. In fact home prices in regional areas were up 15.2 per cent in May on a year ago – the strongest annual price growth in 17 years. Home prices hit record highs in 66 of the 88 SA4 regions across Australia in May. And prices rose in 81 of the 88 SA4 regions in the month.
  • Over the past year, total returns on residential property (includes capital growth and rents) were up by 14.3 per cent, the strongest growth in 5½ years.

Sharemarket

  • Last Friday, both the S&P/ASX 200 index and All Ordinaries index were at record highs. The ASX 200 index stands 23.3 per cent higher than a year ago with the All Ordinaries index up by 21.6 per cent.
  • Total returns on Australian shares (share prices and dividends), as measured by the All Ordinaries Accumulation index, rose by 30 percent in the year to May, outpacing property returns for the fourth straight month.

Used car prices

  • In more ‘normal’ times, Aussie car owners would expect that the value of their rides would fall over time. But over the past year, used car prices have been rising in annual terms.
  • The Datium Insights-Moody’s Analytics Used Vehicle Price Index increased by 47.4 per cent on a year-ago basis in May, compared with 59.6 per cent in April. Car prices rose by 46.9 per cent while truck prices increased by 47.2 per cent. Vehicle retention value, measured as price/manufacturer suggested retail price (MSRP), rose by 43.5 per cent compared with a year earlier, with the car component increasing by 44.9 per cent and the truck component rising by 44.4 per cent.

Household savings

  • Government household income support payments, wage subsidy schemes, rising asset returns, higher employment and next-to-no foreign travel have been just some of the factors boosting household savings over the past year.
  • In the March quarter, net savings of Aussie households was $37.7 billion, up from $33.4 billion in the previous quarter. Over the past year, savings totalled a record $201.2 billion or around $8,000 for every person. A year ago (in the 12 months to March 2020) savings totalled just $67 billion.
  • On a rolling annual basis, in the March quarter gross household income rose by 4.2 per cent while consumer spending fell by a record 5.1 per cent.

CommSec luxury vehicle index

  • High and rising wealth levels can be manifest in a number of ways. And one possible manifestation is in luxury or up-market purchases. And one indicator that CommSec has tracked over time is sales of new luxury vehicles.
  • To get a gauge on the luxury vehicle market, CommSec tracks the sales of 17 luxury marques: Aston Martin, Audi, BMW, Bentley, Ferrari, Hummer, Jaguar, Lamborghini, Lexus, Lotus, McLaren, Maserati, Maybach, Mercedes-Benz, Morgan, Porsche and Rolls Royce.
  • In the year to October 2020 – incorporating the peak effects of Covid-19 on the economy – annual sales of new luxury vehicles hit a near 6-year low of 82,323 units. And while at 6-year lows, sales of luxury marques were also well down on the peak levels of 106,658 units in the year to December 2016.
  • Sales have recovered in recent months. In the year to May 2021, 93,057 new luxury vehicles were sold – a 31-month high.
  • In fact in the year to May, annual sales of both Lexus and Porsche new vehicles were at record highs. Rolling annual sales of Mercedes Benz, Maserati, Lotus, Lamborghini, Bentley, BMW, Audi and Aston Martin vehicles were all higher in May than a year ago.
  • Rolling annual luxury vehicle sales are up 11.9 per cent on a year ago and have out-performed the total vehicle market for the past 20 months.

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