Interventions in housing are complex and multi-faceted, with the three main issues at play being housing affordability, financial stability, and the all-important wealth effect.
In the conversation, we tend to focus on affordability and stability, which are undeniably important, but, when you are recovering from a significant economic shock – as we are undoubtedly will be in coming months - the benefits of the wealth effect become more important than when the economy is doing well.
Why? Broadly put, the wealth effect is that when household balance sheets are strong, people feel more confident, and tend to spend more, which supports jobs, incomes and economic activity.
This effect has long been at play in Australia, two thirds of households own their own home, so the record house prices we’ve seen over the past decade has helped fueled the economy, as equity in the home has given people confidence to go out and spend.
EY modelling of the latest Finance and Wealth data from the Australian Bureau of Statistics shows just how big a tailwind the wealth effect can create. EY’s macro model suggests that the lift in Australian’s household balance sheets we’ve seen since the pandemic began should unleash a wave of consumer spending and support a 2 per cent rise in GDP by 2024.
Further boosting this impact is the fact that for many households, it will come as a pleasant surprise. Back at the start of the pandemic, many expected the housing market to collapse, which would have crushed confidence and household balance sheets. Now, households are looking at record gains and an unexpected lift in their household wealth - as we all know from the last time we found $20 in a jacket pocket – surprise gains get spent.