Home owners suddenly have an extra $25,000 to play with

One of the strangest figures in the latest data on household wealth was the staggering effect of home ownership.

Much of the $1.5 trillion of extra wealth that boosted total Australian household wealth to a hefty $16.2 trillion in the March quarter came courtesy of higher home prices.

Higher share prices also played a part but if you average out the data across all of Australia, home owners got an impressive and quite extraordinary $25,000 over the past year just from the increase in the value of their home.

When you consider the situation in the larger capitals of Sydney and Melbourne, that means many home owners will have generated much more wealth through the rising value of their house than their income for the past year and possibly for several years.

This is one of the main factors driving quite a perverse outcome for the Reserve Bank which is trying to dampen inflation by raising interest rates at the same time as property values are boosting the wealth of owners and their inclination and ability to spend more money.

Rising housing wealth driving generational split

It is one of the answers to why predominantly older Australians have been able to maintain their spending despite or even because of higher interest rates, which have been pushing their share, fixed interest and housing wealth higher.

At the same time, younger generations have been really under the pump, trying to pay for larger rent or mortgage payments and the rising cost of food and other essentials and winding down savings.

People are facing very different circumstances spread across largely generational lines as home owners see their wealth rise by a stellar 10.2% in a year while renters and younger people are probably seeing their spending power and wealth heading down by a similar or even greater level.

Six quarters of property driven wealth growth

Overall wealth figures have now risen for six quarters in a row with the Bureau of Statistics saying “residential land and dwellings” was the largest contributor to quarterly growth in household wealth, adding 1.3 percentage points.

Even the RBA has said that the wealth effect is supporting household consumption, with economists also pointing to consumer confidence figures which show that older Australians who own their home outright are spending more than other cohorts.

Independent economist Saul Eslake has said that property speculators have done really well since the halving of the capital gains tax rate back in 1999 and now this “dumb decision” is reducing the effectiveness of monetary policy.

Property props up consumption

While higher interest rates would once have been expected to reduce wealth, that simply isn’t happening at the moment.

“That channel of monetary policy isn’t working in the way the text books say it should,” said Mr Eslake.

There were other factors increasing household wealth, including rising superannuation ($3.88 trillion), direct share ownership ($1.46 trillion) and cash deposits ($1.73 trillion), but the lion’s share of the latest rise came through higher house prices, which now represent a massive $16.2 trillion.

Naturally the ABS figures lag the current situation and there has been some evidence of house prices and rents stabilising and even falling in some states but it is an open question whether this will be enough to move the intergenerational wealth needle too much.