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HOUSEHOLD ACCUMULATION OF WEALTH
At the end of September quarter 2014, household net worth was $7,718.5b, made up predominantly of $5,286.2b of land and dwelling assets and $3,864.9b of financial assets, less $2,049.5b of household liabilities. During the quarter, household net worth increased by $122.5b, driven mainly by an increase in holding gains of $88.4b, of which holding gains in land and dwellings and financial assets was $77.6b and $15.4b respectively.
The increase of $27.3b in transactions in net worth was driven by $10.7b increase in net capital formation of dwellings; and net financial transactions of $14.9b, of which transactions in financial assets were $37.6b and liabilities were $22.7b. The September quarter 2014 increase in transactions in financial assets was driven by $24.2b increase in deposits and an increase of $14.7b in superannuation assets (net equity in reserves of pension funds). These were partially offset by a net sale of $2.5b of shares (equity) and a $2.9b decrease in other accounts receivable. Transactions in liabilities in September quarter 2014 was driven by $18.5b in long term loan borrowing.
Graph 1. Components of household balance sheet
At 30 September 2014, household net worth was $7,718.5b, up from $1,733.4b at September 1994, an average quarterly growth rate of 1.9%. Between September 1994 and the year 2000, the quarterly growth in household net worth was 1.8% but this grew to 2.7% over the following 8 years until the dip in 2007-08 which was caused by the global financial crisis (GFC). Over the years since September 1994, the composition of household assets has changed. The value of residential land and dwelling assets mirrored the growth in net worth over these years due to an increase in housing prices, particularly in the capital cities. The value of superannuation assets grew markedly due to mandatory superannuation introduced in 1992, as well as from capital gains from investing primarily in the share market. There was also growth in household holdings of equity, driven by the household sector acquiring equity when a number of large government business enterprises were privatised; through demutualisations; flotation on the stock exchange of a number of insurance cooperatives and through more active participation in the share market generally. Each of these assets took valuation decreases during the GFC but have recovered strongly since then. The household sector partly funded this increase in assets by increasing their loan liabilities.
HOUSEHOLD SECTOR FINANCIAL RATIOS
The financial ratios graphs presented here are derived from the household balance sheet, financial account and income account (Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0)).
Graph 2. Interest payable to income ratio
The interest payable to income ratio represents the proportion of household gross disposable income that is required to meet interest payments. Interest payable in the graph is the "adjusted interest payable". It includes the financial intermediation services indirectly measured (FISIM) on the dwelling loan plus the dwelling interest payable from the household income account. It therefore represents the total nominal amounts paid as interest by the household sector. The interest payable to income ratio is relatively volatile in the short term, however some long term trends may be observed. The low ratio of 7.2% in September 1994, gradually climbed until March 2008 where there was a sharp increase to 14.9% followed by an even sharper increase to 16.4% in June quarter 2008. This was followed by decreases, falling to 10.8% by September 2009 before stabilising again from March 2010. This trend was driven by a sharp increase in the amount of interest payable just before the GFC followed by a sharp drop in the amount of interest payable over the course of the GFC without any corresponding changes in gross disposable income. The ratio at September quarter 2014 was 10.3%.
Graph 3. Gearing ratios
Source(s): Table 51. Financial Accounts Summary of Loan Outstandings to Households for Housing by Type of Lending Institution ($ million); Table 34. Household Balance Sheet, Current prices ($ billion)
The mortgage debt to residential land and dwellings ratio shows the extent that household residential real estate assets are geared. At 30 September 1994, mortgage debt represented 15.5% of household residential land and dwellings, and then gradually grew to 24.4% at the start of the GFC (March 2008). A year later (March 2009) it peeked at 29.2% and by March 2010 had fallen sharply to 25.7%. Since March 2010, the ratio has increased, recording a peak of 30.6% at 30 September 2012. In the last two years the ratio has stabilised and is at 29.0% in September quarter 2014.
This increase in the time series of the ratio indicates that mortgage debt grew faster than the value of the residential real estate owned. One of the reasons for this growth is that since the deregulation of the Australian financial system, financial institutions have relaxed lending criteria and the household sector increasingly used mortgage loans for purposes other than housing, for example, financial asset purchases.
The debt to assets ratio gives an indication of the extent that the overall household balance sheet is geared. That is the degree to which assets are dependent on debt. At 30 September 2014, household debt was equal to 21.0% of assets, an increase on 30 September 1994 when debt was equal to 14.0% of assets.
The debt to liquid assets ratio reflects the ability of the household sector to extinguish debts in a short period of time using their readily available, or liquid, assets. The following are classified as liquid assets: currency and deposits, short and long term debt securities, and equities. The ratio of household debt to liquid assets rose from 79.9% at 30 September 1994 to 135.9% per cent at 30 September 2014.
ANALYTICAL MEASURES OF INCOME, CONSUMPTION AND WEALTH
Graph 4. Household net saving
With the onset of the GFC in 2007-08 and with the improvements in the terms of trade (from 2003-04 to 2009-10), household income began to grow faster than consumption. This is reflected in the increase in the net saving ratio in this period. The graph above shows the transmission of the crisis through the losses in real holding gains, and specifically real holding losses in financial assets (insurance technical reserves and equity) and land and dwellings. The overall wealth effects during the GFC can be seen when other changes in real net wealth are added to net saving in the graph above. For the current quarter, household net saving was $33.5b and with the addition of the real wealth effects, net saving increased to $117.4b.
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