The Evolving Face of Savings and Investments

December 22, 2023

The Australian economy has performed better than expected this year, largely due to fiscal policy support and high population growth. A key factor has been the accumulation of household savings during the pandemic, as lockdowns and income constraints led to what some economists call ‘excess saving’. Unlike other developed economies where saving ratios have returned to pre-pandemic levels, Australia and the US have seen ratios drop below those levels, indicating households may be using these savings to support consumption, especially in the face of declining real disposable incomes.

Household Savings Dynamics

Contrary to some beliefs, households haven’t depleted their savings. They’re saving less than during 2020-21 but are still saving. ‘Excess saving’ is a theoretical concept, hard to quantify due to various factors like income confidence, population age, investment returns, and overall economic conditions. The desired saving level is assumed to be the average pre-pandemic rate, but it’s uncertain if this is still the preferred rate. It’s estimated that significant ‘excess’ savings were accumulated during 2020-22, dropping below pre-pandemic levels in the last quarter of 2022.

Changing Nature of Saving and Wealth

Analysing savings from a different perspective, it’s not just about the flow of additional savings but the change in the stock of savings – a combination of new savings and the increase in value of existing savings. In Australia, this includes deposits, equities, and superannuation, as well as real estate. Since 2020, there’s been a rise in deposit values, though some decrease has occurred recently. Interest rate hikes have driven households to pay off debt and move savings into deposits, while negatively impacting equity and superannuation balances. Consequently, financial asset holdings have dipped below pre-COVID trends, with households favouring safer, more liquid assets due to economic uncertainties.

Impact of Housing Market on Savings

Household saving also encompasses non-financial assets like housing. The substantial rise in house prices across Australia has significantly increased household wealth, even outpacing pre-pandemic trends. However, the impact of this increase on spending and saving behaviour is debatable. While homeowners may feel more financially secure as their property value increases, it doesn’t necessarily lead to increased spending, as real estate value is only realized upon sale. Yet, historical data suggests households tend to save less when their wealth, including house value, increases. Current models, factoring in potential improvements in real disposable income and stable interest rates and house prices, predict that the saving ratio will remain low, possibly declining further.

Future Outlook

In conclusion, the ‘saving mountain’ may be smaller than previously thought, as new savings are compensating for losses in the equity market. The rise in house prices could discourage increased saving rates, leading to a potential increase in spending with any rise in real disposable income. Recent Reserve Bank of Australia (RBA) analysis indicates that a higher proportion of disposable incomes is going towards mortgage payments, the highest in twenty years. However, this doesn’t consider unscheduled payments, which have varied over time. Currently, high living costs and interest rate hikes are causing households to decrease unscheduled payments. If inflation lowers while maintaining a strong job market, households might better manage these higher mortgage costs.