PORTFOLIO POINT: Official data shows household financial assets are at a record, with most of us having more disposable income and savings, and many throwing caution to the wind.
The Australian Bureau of Statistics (ABS) released a bit of data over the last couple of weeks that may help explain the apparent disparity between data strong consumer spending on the one hand and then high savings, deleveraging, a soft equity market and very weak credit growth on the other.
How is it possible that all seem to be occurring at the same time? It just doesn’t seem plausible, right? Well, it is and the ABS data makes it plain why. Australians have never been wealthier – ever. Take at a look at chart 1 below.
Chart 1: Australian household financial wealth
It seems too good to be true, especially when you pick up a paper and it’s all about slowing global growth and the disintegration of the euro etc. But for Australia, total financial wealth of households (which excludes property, art etc) is at $2.7 trillion, or almost $60 billion higher over the year, and about $500 billion higher than the pre-GFC peak.
Australians are now more than two times wealthier than what we were a decade ago. This is quite something and thinking of it another way, on a per household basis, equates to about $346,000 for each and every household, up from $172,000 per household in 2002.
Now the implications of this data are profound. The literature on wealth and its influence on the macro economy is thorough and generally shows that wealth effects on economic growth and other asset prices can be very significant. However, the problem with some of the literature of course is that it tends to look only at price moves as a proxy for wealth – for instance stock prices or house prices – which overlooks the total stock of wealth. The reasons for this vary and include the frequency and availability of data. But it’s also because, as the argument goes, perceived wealth is what’s important and if people see stock prices falling they perceive they are less wealthy, although that of course may not be true. They may be less wealthy than what they otherwise would have been if prices had risen of course, but falling stock prices don’t mean your total wealth is lower overall, as the above data shows.
Anyway the point is that stockmarket declines since the GFC suggest that household wealth has taken a beating – or at least people would perceive it that way – and certainly the market is still some 40% below its pre-GFC peak. This in part is why the consumer caution thesis was so popular. Falling stock prices would suggest, alongside a sluggish property market, weak credit growth and rising savings that consumers would be cautious.
Instead though, household spending has been quite strong and is a bit of a mystery against that backdrop. On the wealth effect, I suspect that it is advances in technology which have made stock prices less relevant as the source of perceived wealth. Households are much more aware of their total wealth holdings than they probably were in the past – bank balances, equity holdings, even your super balance – are all available at any time online. Moreover, households are also much more engaged in the investment process than they were in the past – they are much more savvy. So while the equity market might be down 40% from the peak, wealth is up 23% – and households know it.
This fact may help explain another interesting item to come out of the ABS data. Households aren’t deleveraging at all it seems. Indeed, liabilities rose $14 billion in the March quarter and are $78 billion higher over the year – more than the wealth gain – to a new record.
Chart 2: Household liabilities
The growth rate of debt accumulation has definitely eased – to about 5% compared to the double digit rates record prior to the GFC. But it’s not being cut and the extraordinary wealth of households must be the reason households feel confident enough to take on more debt. Because, compared to our financials assets, our debt burden is quite light – we’re not carrying too much debt at all.
Chart 3: Household financial assets – liabilities
Chart 3 above shows financial assets at 1.7 times total liabilities, down only a fraction from 1.8 times just prior to the GFC – and that’s with the 40% decline in stock prices. It is charts like the one above that highlight why charts like the one below (a good chart from the RBA) can lead to incorrect conclusions about the debt burden. The charts combined show that while debt has increased, household incomes are rising at the same or a slightly faster pace and wealth is vastly in excess of debt.
Chart 4: Household debt to income
All of this firms up my case that we are certainly at the trough of the credit cycle. And my broader point that the consumer caution thesis, as a structural phenomenon, doesn’t have a lot of empirical evidence. For mine, it’s less the case that households are being cautious, but rather more discerning, and the distinction goes beyond semantics.
Consider the high level of household savings. The consumer caution thesis posits that high savings are being deliberately targeted by cautious consumers who have cut back on spending. Think of what ABS wealth data is showing though. Record wealth, net wealth almost back to records. Similarly we know car sales are at record levels, we’re travelling overseas at record rates. Household spending more broadly is strong. And, this same ABS data shows we’re not deleveraging at all.
For mine, it seems that savings are simply the residual, the fallout from a sluggish property market, rather than sluggish spending. Debt is increasing at slower rates because house prices are going nowhere – there is no incentive to gear up. So the interest burden is falling (Chart 4 above shows this) and what’s being saved in interest goes to savings. That doesn’t mean that consumers are cautious or risk averse. Just sensible. That being the case, the most logical explanation for the increase in savings isn’t because consumers have closed their wallets or are risk averse, but because there is no reason to gear up, to take on debt. Almost as an after-thought, savings are increasing. In other words consumers are not targeting a lift in their savings and cutting back on spending to achieve that target as is widely assumed. They’re just not borrowing as much and savings have increased as a natural consequence, i.e. what would have gone on interest repayments is going into savings.
This touches on another point – the RBA’s recent assertion that Australian households are risk averse and have reduced or are reducing their equity holdings. Certainly you could come to this conclusion with a quick glance at the data - and Chart 5 below appears to make the RBA’s case.
Chart 5: Household equity holdings as at March quarter 2012
As the chart shows, households have cut their direct equity holdings by 44% to $232 billion, when compared to the pre-GFC peak of $418 billion. Yet, when you consider that stock prices are down about 40%, you can see that the decline is almost completely due to price effects rather than households selling down their holdings per se. It’s true to say that households haven’t added to their direct holdings of shares, which is why the proportion of wealth that households hold in equities directly has fallen to 8% in the March quarter 2012 from a peak of 18% prior to the GFC.
However, and as I discussed in my note of June 4 Follow the Money, households are lifting their exposure to equities via their super. The chart below shows this again with more recent ABS data.
Chart 6: Pension fund equity holdings ($m)
The chart shows that pension fund equity holding at back at a record and indeed Chart 7 below shows that pension funds have almost fully restored the allocations to equities that prevailed just prior to the GFC. Furthermore, they remain well above the allocations that existed in the seven years prior leading up to the 2007 peak.
Chart 7: Pension fund equity holdings (% of total holdings)
For this to be the case, noting again that stocks are 40% below their pre-GFC peak, super inflow into equities must be high. My back of the envelope calculations suggested two-thirds in my June 4 note.
So then, it appears that households are not risk averse, contrary to the RBA’s claims. If this were truly the case, it would be evident in the portfolio allocation of fund managers (as dictated by households) and we wouldn’t see the distaste for short-term debt and bonds that is evident. Rather the data is showing that households have decided not to add to their direct equity holdings, instead investing in stocks through their super with a longer-term view. It is short-terms savings that are being directed more to cash, rather that stocks (direct equity holdings). It makes sense for households to split their time horizons given equity market volatility. But this should not be confused with generalised risk aversion.