Property downturn will hit hard, experts say

The wealth of Australians has hit a record high, but with most of it geared into property, households are exposed to risks



The household net worth of Australians rose to $8.09 trillion at the end of the March 2015 quarter, according to official figures, and with most of our net worth geared into property, households are at risk.
According to the figures released by the Australian bureau of Statsitics, property assets account for $5.45 trillion of our overall net worth. Financial assets, such as shares, account for $4.13 trillion. Meanwhile, Australian households have $2.12 billion of household liabilities.
Specialising in risk tolerance and risk-related matters, FinaMetrica co-founder Paul Resnik and consulting actuary Peter Worcester, warn that the large allocation to property exposes households to higher interest rates and a sudden fall in values.
"Most Australians dive into property without thinking more deeply about other investment options. Without the benefit of good financial advice, many Australians are ignoring the investment opportunities offered by other assets, such as managed funds, offshore investments and alternative investments such as infrastructure which all enable investors to diversify their wealth and better insulate their assets against a financial or macroeconomic shock such as a sudden rise in interest rates, rising unemployment or an Australian recession,” Resnik said.
Household net worth rose by a total $232 billion over the quarter, with a $129 billion rise in financial assets, reflecting higher equity values, and an $80 billion rise in property assets.
The ABS notes the mortgage debt to residential land and dwellings ratio has declined since peaking at 30.6% in September quarter 2012, but has remained unchanged since December 2014 at 29.2%.
"While the ratio has stabilised, it remains high, and this highlights that for those households with mortgages, a large portion of their income goes towards debt servicing, which may become impossible to service if interest rates were to rise, which is exactly what they are likely to do in the US," said Worcester.
“Many Australians look to be in need of good investment advice. By better understanding how financial markets work, and the impact of asset allocation on portfolio behaviour, Australians can be better prepared for a financial shock when it happens.”

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