Households dust off the bank deposit book
THE return of the prudent consumer is being accompanied by the return of the risk-averse consumer. Households aren't only saving more of their incomes, they're saving more through banks and less through shares.
THE return of the prudent consumer is being accompanied by the return of the risk-averse consumer. Households aren't only saving more of their incomes, they're saving more through banks and less through shares.In the days when the public was less economically literate, many people had no conception of saving other than putting money in the "savings accounts" offered by banks. After a season in which we thought that was for mugs, saving through bank accounts is back.Remember when John Howard was encouraging us to become "a nation of shareholders"? Well, owning shares directly is no longer fashionable. Of course, working households' indirect ownership of shares via superannuation increases as each pay day passes.But, as the Reserve Bank observes in an article in last week's quarterly Bulletin, households have shifted their "portfolios" away from riskier financial assets, such as shares, and towards less risky assets, such as deposits. I'll be drawing from that article.I've no doubt much household saving has taken the form of reducing debts and getting ahead on mortgage repayments. There was a time when Aussies' highest financial goal was to repay the mortgage as early as possible. That goal is coming back into its own with the return of the prudent consumer. And, as a tax-effective investment strategy, repaying the mortgage has always scored highly exceeded only by negatively geared property or share investments.Which brings us back to risk and risk aversion. Between 2003 and 2007, the proportion of household financial assets held in shares (both directly and via super) increased from 35 per cent to 45 per cent. Much of this increase came from capital gain. Total return on shares averaged about 20 per cent a year over this period, compared with average deposit rates of about 5 per cent. But then came the fall in wealth caused by the global financial crisis and the mild recession of 2008-09.Between 2008 and 2011, there were net outflows from households' direct holdings of shares of $67 billion, while holdings of deposits rose by $225 billion.It's likely people were reacting, on the one hand, to the large capital losses in the sharemarket, but also to the market's volatility, which has doubled since 2007.But, on the other hand, people would have been reacting to the advent of much higher interest rates offered on bank term deposits as, in the aftermath of the global crisis, the banks bid up those rates in their competition to replace now-riskier overseas funding with more stable, "stickier" funding from domestic deposits.Over the past 30 years, the average annual real return on Australian shares (including capital growth and dividends) has exceeded the average annual real return on deposits by about 5.5 percentage points. Since 2008, however, that's been reversed, with a return on shares of minus 5 per cent on shares versus 2.5 per cent on deposits.The share of households' financial assets held directly in equities has more than halved from 18 per cent before the crisis to 8 per cent at the end of last year. In contrast, the share of deposits has increased from 18 per cent to 27 per cent.That this shift has been driven mainly by households' greater aversion to risk is confirmed by the changed answers people are giving to relevant questions in the survey of consumer sentiment and other reputable surveys.In theory, households have shifted to a less risky risk-return trade-off and, by doing so, are willing to live with lower returns over the longer term. But whether the "equity premium" the much higher rate of return on shares relative to fixed-interest securities will stay as high as it's been in the past is open to doubt.The equity premium has always looked much healthier over long periods than it has over many shorter periods, meaning people in or approaching retirement shouldn't be too mesmerised by it and should be favouring more stable returns.So, the shift from shares to deposits may well be explained partly by the baby boomers' rapid approach to retirement.The big super funds have also shifted their mix away from shares to some extent, though they've done so by less than have self-managed super funds, suggesting they're more wedded to "equity" than they ought to be.Why is that? Well, part of the problem is that dividend imputation means share returns are more favourably taxed than fixed-interest returns. Not good.Twitter: @1RossGittins