Australian household wealth plunges amid falling property prices and rising interest rates

It was hardly a shock but the latest Australian Bureau of Statistics (ABS) wealth data exposes a real wall of worry.

Household wealth dropped by $57.4 billion or 0.4% over the December quarter, with modest gains in super accounts totally outstripped by falling property prices to leave Australian families poorer.

Since then, even those super accounts are likely to have lurched into the red, so the “wealth effect” can be expected to be stuck firmly in reverse gear this year.

Broadly speaking, the wealth effect causes increased confidence to spend and invest when overall wealth is heading higher and the reverse of that when it heads down.

Expect to see consumer spending fall

It is one of the drivers of cyclical movements in the economy because when wealth starts to fall like it is now, households become less confident about spending, which is bad news if you are trying to sell furniture, appliances or cars.

This year the effect could be even more pronounced due to the interplay with rising interest rates which will be adding some quite restrictive spending constraints on a large swathe of the population.

The ABS numbers show that the value of Australian property fell 2.7% or $260 billion in the quarter to add 1.8 percentage points of the wealth decline, while super assets rose 3.6% to add $120 billion to wealth.

The figures have already showed an effect in consumer confidence which has fallen sharply to multi-year lows as the savings buffers built up during the pandemic are used up and the budget strain of rising prices and interest rates begins to show.

In broad terms, economists would expect the 3% fall in household wealth over the past year to lead to a 0.5% fall in spending, although this squeeze could be even more severe than that.

RBA should be pleased rate hikes are starting to work

The one group that might be pleased to see the wealth plunge is the Reserve Bank of Australia (RBA), because it shows that its rapid-fire interest rate rises are starting to have an effect and should start to reduce inflation as demand falls.

The key for the RBA is to keep unemployment low because if the job market holds up, there is less of a chance of the economy slipping into a recession.

After raising rates from a record low of 0.1% last May to the current 3.6% and more hikes expected, the RBA would want to see some more restrained consumer spending as more household cash is soaked up by mortgage payments.

With essential payments such as the mortgage increasing, you would expect to see discretionary spending slowing rapidly, although high savings levels and pent-up demand for travel from the pandemic may have slowed the effect somewhat.

This year the discretionary spending slowdown should start to hit quite hard, with retail spending and areas including holidays, transport, carts, recreation and hospitality all in the firing line.

Will the RBA pause hikes soon?

ANZ figures show that consumer confidence fell to the lowest levels since the depths of the COVID pandemic last week and is running well below 30-year averages.

The acid test will be whether the signs of reduced confidence and spending are enough to persuade the RBA to pause its rate hikes to monitor the lagged effects of previous rises as they flow through.

The situation in Australia is quite different from many countries because the majority of our housing loans have floating interest rates so there is a danger the RBA could keep hiking rates for too long and prompt a recession.

That picture is complicated further by the large number of fixed rate loans over shorter terms that were written during the pandemic, which has created a rolling series of mortgage cliffs as the loans expire and households are suddenly exposed to much higher mortgage repayments.