Financial Turmoil in Australia: Property Market Downturn and Interest Rate Hike Cause Household Wealth to Plummet
Australian Household Wealth Plunges Amid Falling Property Prices and Rising Interest Rates
The latest data from the Australian Bureau of Statistics has revealed that household wealth in Australia dropped by $57.4 billion or 0.4% in the December quarter of 2021. This decline, primarily driven by falling property prices, has left Australian families poorer. Property losses outstripped even gains in super accounts.
The wealth effect, which causes increased spending and investment when overall wealth rises and the reverse when it’s heading down, will likely be stuck firmly in reverse gear this year. Rising interest rates will also add more restrictive spending constraints on a significant proportion of the population. As a result, economists expect to see consumer spending fall.
Falling property prices and rising interest rates
The decline in Australian property values significantly contributes to the fall in household wealth, with property value falling 2.7% or $260 billion in the quarter, adding to the 1.8 percentage point wealth decline figure. Meanwhile, super assets rose by 3.6%, adding $120 billion to wealth.
The interplay between falling property prices and rising interest rates will likely severely impact consumer spending. The savings buffers built up during the pandemic are being used up, and the budget strain of increasing costs and interest rates begins to affect people’s spending habits.
RBA rate hikes and their effect
The Reserve Bank of Australia (RBA) may be pleased to see the wealth plunge. It shows that its quick-fire interest rate rises are starting to take effect, reducing inflation as demand falls. However, the key for the RBA is to keep unemployment low to prevent the economy from slipping into a recession.
The RBA has raised rates from a record low of 0.1% last May to the current 3.6%, and more hikes are expected. It wants to see more restrained consumer spending as mortgage payments soak household cash. Discretionary spending should start to slow down, with retail spending and areas including holidays, transport, cars, recreation, and hospitality in the firing line.
- Economists expect a 3% fall in household wealth over the past year to lead to a 0.5% fall in spending.
- Retail spending and areas such as holidays, transport, cars, recreation, and hospitality will likely be hit hard by the discretionary spending slowdown.
- The decline in consumer confidence to multi-year lows reflects the savings buffers being used up, and the budget strain is beginning to show.
- Falling property prices largely drove the decline in Australian household wealth in Q4 2021.
- The wealth effect will likely be reversed this year, with consumer spending expected to fall.
- The Reserve Bank of Australia’s rapid-fire interest rate rises show that they are starting to take effect and reduce inflation as demand falls.
- The RBA’s fundamental goal is to keep unemployment low, with more restrained consumer spending essential.
The actual wall of worry for Australians is falling property prices and rising interest rates, leading to declining household wealth. This will lead to declining consumer spending, further economic hardship, and potential job losses. The RBA hopes its rate hikes will reduce inflation, but it remains to be seen if this is enough to keep the economy from slipping into a recession.