Wealth hits new highs but conservative consumers opt to pay down debt

Australians are now the wealthiest they have ever been, with the collective value of all assets reaching a record high of $5.87 trillion, according to the latest figures released by CommSec.

But while a growing economy should keep increasing Australians’ wealth, economist Craig James warns the “new conservatism” among consumers is playing down growth.

“In theory, record wealth, a strong job market and strong confidence levels should add up to greater consumer spending. But the ‘new conservatism’ of consumers is standing in the way. That ‘new conservatism’ was highlighted in yet another drop in debt levels.”

The figures show private sector debt for the fifth time out of the past six quarters, dropping by 1.5% during the quarter, and by 3.7% over the year. Per-capita debt fell from $25,700 to $25,200, and this slide, James notes, is “unprecedented over the past 50 years”.

“The simple fact is that Australia’s love affair with debt has come to an end. The only time in the past 50 years that debt was falling similarly to now was 16 years ago, so the reduction in debt levels is almost unprecedented.”

With consumer spending so soft, James notes, the Reserve Bank will do well to observe the latest data.

“Clearly the pre-conditions are in place for consumers to spend, but cash registers are ringing only softly. The reason is contained in the latest debt figures – down again in the latest quarter and part of a downward slide that has been going on for around 18 months.”

“You can understand why the Reserve Bank thinks rates will rise over time (rising wealth) but is in no rush to lift rates (falling debt). The November Reserve Bank Board meeting will clearly hinge on next week’s inflation figures.”

The figures reveal that on a per capita basis, the average Australian has wealth equivalent to $262,500. While this actually a drop of $500 from the March quarter, James notes this is due to rising population growth.

The collective wealth of Australians held in property, shares and other assets came to $5.871.2 trillion by June 30, 2010, representing a 0.2% increase and a fifth consecutive quarterly rise. Over the year, wealth rose by 13.3%, while over the decade, wealth levels have grown by a solid 127.2%.

“You may not feel wealthy,” James notes, “but the figures tell otherwise. Wealth held in assets likes shares, homes and cars hit fresh record highs at the end of June, totalling almost $6 trillion dollars.”

“The fact that Australian consumers have gone through the global financial crisis and come out the other side with record wealth levels highlights just how well the economy has fared.”

But the ultimate story from these figures, James says, is that despite a growing economy and strong dollar, Australians won’t spend unless they’re forced to.

“As we have noted in the past, the fundamental drivers for Australian retailers are promising. The job market is strong, consumers are generally happy, wealth is at record highs and the high Australian dollar is making imported goods cheaper. But if you haven’t got to spend, you won’t, especially if you are trying to get your debt levels down.”