The keys to Australia's household wealth
Australians are amongst the richest in the world, helped in large part by the value of dwellings and our compulsory Superannuation system. Today, Australia's household wealth stands at almost $14 trillion.
One of the most important channels that lower interest rates works through is via higher asset prices, leading to increased levels of household wealth. Theoretically, households should consume more as wealth rises. Changes in the ‘wealth effect’ are a key factor in assessing the outlook for the Australian economy, because a large share of the economy is household consumption.
Low interest rates are designed to spur borrowing, reduce saving, and generate higher house prices. This assists the RBA in meeting its goals in terms of employment and inflation by stimulating consumption. The longer term question for the Australian economy is whether the run-up in asset prices (and subsequent increased levels of household debt) will result in rising financial instability risks in the future, particularly should interest rates need to increase to control rising inflationary pressures.
In the attached analysis, I delve into Australia's household wealth. For investors, understanding the impacts of higher house prices on wealth, and which companies and sectors stand to benefit most from the increased consumption that will likely follow, could help them in their pursuit of long-term share market gains.
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Anthony Doyle is Head of Investment Strategy for the Firetrail S3 Global Opportunities Fund. His primary responsibilities include fundamental idea generation, portfolio analysis, and economic insights including currency and macroeconomic risk...