Property splurge could trigger correction
The current rush to property is making Australians vulnerable to rising interest rates, or to a recession, which could trigger a property-market correction, risk experts believe.
At the end of March quarter 2015, household net worth rose to $8.09 trillion from $7.86 trillion in the December 2014 quarter.
This was predominantly $5.45 trillion of property assets, and $4.13 trillion of financial assets such as shares, less $2.12 billion of household liabilities, according to Australian Bureau of Statistics (ABS) data.
During the quarter, household net worth rose by $232 billion, driven mainly by a $129 billion rise in financial assets, reflecting higher equity values, and an $80 billion rise in property assets.
FinaMetrica risk experts Paul Resnik and Peter Worcester said that such a huge allocation to property exposes households to higher interest rates and a sudden fall in values.
"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," Resnik and Worcester said.
"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."
The ABS also found while the mortgage debt to residential land and dwellings ratio has declined since peaking at 30.6 per cent in September quarter 2012, it has remained unchanged since December 2014 at 29.2 per cent.
Resnik and Worcester noted that while the ratio has stabilised it has remained high, highlighting that households with mortgages have a large portion of income going towards debt servicing.
"This may become impossible to service if interest rates were to rise, which is exactly what they are likely to do in the US," they said.
"That sends an inevitable signal to households that interest rates will rise in Australia in the medium term and it's time now for households to reassess their investment portfolios."
Recommended for you
The Federal Court has dismissed a conflicted remuneration case brought by ASIC against the director of life insurance distributor Freedom Group, where Bali holidays and Vespa purchases were among sales incentives.
Policy and advocacy specialist Benjamin Marshan has left the Council of Australian Life Insurers after less than a year, having joined in March from the Financial Planning Association of Australia.
The declining volume of risk advisers meant KPMG has found a rising lapse rate for insurance policies arranged by independent financial advisers, particularly in the TPD and death cover space.
The Life Insurance Code of Practice has transferred from the Financial Services Council to the Council of Australian Life Insurers.
