Two factors ensure that Australians grew their wealth to a new record

There are two powerful forces that have ensured Australians keep growing their wealth to record levels – despite the significant headwinds provided by the pandemic and the associated lockdowns and job losses.

Those two factors are the paying down of debt – largely on properties – and the rise in the value of household assets – predominantly those same properties plus shares and other investments inside and outside of superannuation.

Also playing a part in the increasing wealth was the JobKeeper program, which tipped $90 billion into the pockets of Australian workers and small business owners.

That stimulus could have been even higher if it had reached the treasury estimate of $150 billion.

JobKeeper also helped grow private wealth by $501 billion

Indeed, while some of the increasing wealth of Australian households was a transfer from the Federal Government, the “underspend” on JobKeeper and the beginnings of an economic recovery have left the budget deficit at $134.6 billion to the end of February – a very large $23.6 billion improvement from the December estimate that it would reach $157.7 billion.

The end result of all of this is that Australia’s total household wealth increased by $501 billion in the December quarter, reaching a record high of $12 trillion.

That means that the “average” Australian now has an impressive $467,709 in net wealth – although I will come back to explain that “average” further to show why it exaggerates the wealth of most Australians significantly.

Recipe for the economic miracle

So how did we pull off such an economic miracle at a time when you might have expected wealth to be declining, along with employment and the economy in general?

The answer is largely down to the strong growth in the property and share markets, combined with the paying down of debt levels as household savings increase markedly and interest rates fall to record lows.

Australia has pulled off a remarkable feat in reducing the total amount of housing debt at the same time as it is enjoying a massive boom in prices and surging mortgage approvals for new buyers and those refinancing.

The value of residential land and dwellings grew by 3.5% or $246.5 billion over the December quarter – the steepest rise since the December quarter of 2016.

That created 2.1% of the 4.3% growth in quarterly household assets and two-thirds of the 7% growth in household assets over calendar year 2020.

All of that may not have been as impressive if it had been accompanied by soaring housing debt.

Debts being paid down even as property prices rise strongly

However, while Australia’s housing wealth was flying, the ratio of housing-debt-to-income continued to fall, down 2.5% through 2020 to create the biggest decrease since 1990.

Despite the frenzy of new loans, the outstanding stock of mortgage debt is barely growing and as a ratio of household incomes and GDP, it is actually shrinking.

The reasons are not too hard to find when you think about it.

Falling interest rates and rising household savings have led to a situation in which many longer-term property owners who have not adjusted their repayments downwards are paying off their loans quite quickly.

With term deposit rates now so low, many households have also deliberately socked away their extra savings in mortgage offset accounts or by directly repaying the mortgage faster.

That has been a winning strategy with the value of their housing asset rising at the same time as the loan supporting it is shrinking, greatly improving their household net worth – something that is clear in the Australian Bureau of Statistics figures.

Most of us are “below average” – so don’t worry

While mentioning those figures, I should stress that there is no need to get disheartened if the “average” Australian net worth of $467,709 does not compute to anywhere near your personal situation.

The weakness of using an average is that the figures can easily be skewed much higher by a few outliers and that is indeed the case with these numbers.

Just consider for a moment the fact that there are an estimated 104 billionaires in Australia according to the latest estimates.

104 billionaires bumping up the average

When you divide their net worth alone across the population of Australia, it bumps up the average significantly, and that is before you consider the much larger numbers of multi-millionaires which nowadays also includes even some otherwise very humble property owners who would in earlier times have been deemed “middle class”.

It is also worth remembering the difference between income and wealth – there are many people with high wealth locked into their property but limited income, what is known as being asset rich and income poor.

With a very large number of properties now worth over a million dollars, all it takes to be on the upper side of the “average” wealth is to pay down property debt – the very behaviour we have observed across the population at the moment.

What all of that means is that a very large number of Australians – possibly as many as two-thirds – will find themselves being “below average’’ on the wealth scales.

Australia better than many others but still very unequal on wealth

While Australia scores reasonably well on wealth equality compared to many countries as measured by the Gini coefficient – largely due to a reasonable social security net and Medicare – wealth is still spread quite unequally.

For example, an Australian Council of Social Service (ACOSS) report released in December last year found that in 2018, the highest 10% of households owned 46% of all household wealth.

The lowest 60% of households, which were predominantly younger and poorer, owned just 16% of the wealth.

If anything, these trends may have worsened since then with much of the growth in wealth entirely missing those who don’t hold assets such as property and shares in a time of very low interest rates.

However, many of those in that lower 60% will still rise up the wealth scales as they grow older, through inheritance and also through buying and paying off investments and greater earning potential.

Others will not and there will be a constant supply of the less wealthy arriving in the form of children.

Wherever you are on the wealth spectrum, the takeaway observation is that the long-term road to rising up the curve is to sustainably accrue assets such as superannuation, shares and property and progressively pay down debts.

That is a formula that a large number of Australians are following at the moment and it is really paying off by generating much higher wealth.