Submission Question

What measures of household wealth are available in Australia? Briefly indicate any major advantages and disadvantages of each measure.

Household wealth is calculated as the sum of households' total financial and tangible assets minus households' total liabilities. In Australia, there are four primary measures of household wealth available, each having its own advantages and disadvantages. These are a time series measure constructed quarterly by the Reserve Bank of Australia (RBA measure), a time series measure produced annually by the Australian Bureau of Statistic as part of the Australian System of National Accounts (ASNA measure), a measure of the distribution of wealth that is based on the Survey of Income and Housing by the ABS (SIH measure) and a measure of the distribution of wealth which is based on the Household, Income and Labour Dynamics in Australia (HILDA measure). (Bloxam, et al., AER 2009) The different measures of wealth are useful for different purposes. The time series based measures (RBA and ASNA measure) have a narrower coverage than the distributional measures (SIH and HILDA measure), but have the advantage of better comparability over a relatively long time history. On the other hand, the distributional measures allow more detailed comparisons to be made across other dimensions including income, wealth and geographical location. (Bloxam et al., AER, 2009) All four measures of household wealth provide broadly similar estimates of the value of aggregate household assets, liabilities and wealth in comparable periods, and those differences that do occur tend to reflect differences in the scope of measurement, rather than by error in measurement. (Bloxam, et al., AER 2009)

What are the main forms in which Australian households hold their wealth? Has the pattern significantly changed over time?

Household wealth is the accumulated assets minus the total liabilities which a household has. Assets of household wealth include stocks such as property, savings. Household wealth has been growing in 1994 from 1.7bil to 2.7bil in 2000 (Northwood, et al., 2002).The increase overtime is a result of reallocation of flows of wealth as they are influenced by capital gains and losses.

Household savings, a flow which contributes to household wealth, has been declining since the late 1970's. An example of this decline is shown in the figure below. (The Allen Consulting Group, 2007)

This pattern suggests that household wealth has been decreasing as the flow of savings rate is deteriorating; however increases of household wealth shows this in not true. As there is no correlation between savings and wealth it is an indication that Australians have changed their methods of holding their wealth, where they have reallocated their savings to other stocks of wealth.

Prices of property, which accounts for majority of assets in Australian households, have increased dramatically through the past few years. In 2006 residential property represented 57% of households' total assets, this exemplifies that property capital gains and losses contribute to majority of changes in household wealth (The Allen Consulting Group, 2008). Also, from 1997-2004 house prices rose by 108% (Kryger, 2006).

These prices have increased the capital gains for existing home owners. However for new home buyers this becomes problematic as home loans increase, creating larger liabilities, therefore decreasing overall wealth. Also for new home buyers, they will suffer higher ratios of household interest payments to savings. This contributes to the decreases in saving and reallocation of wealth from savings to