Despite a backdrop of socioeconomic uncertainty and increased financial market volatility, growth in the personal savings of Australians remains strong. As of June 30 last year, total personal investments stood at $2.3 trillion, representing an even larger pool of savings than the superannuation system.
However, Australian households are increasingly exposed to significant concentration risk from their holdings of term deposits, bank shares and investment property. Rice Warner’s recently released Personal Investments Market Projections Report reflects the substantial commonality of risks involved in investment properties and typical equity portfolios.
Australians have, over the past decade, held much of their assets in cash, equity and investment property. At the end of June last year, the average asset allocation of personal investments was 44.3 per cent in cash and term deposits, 40.6 per cent in investment property, 12.9 per cent in equities and 2.1 per cent in fixed interest and loans.
In general these assets are largely underpinned by Australia’s large banks, which are market leaders in providing term deposits and extending loans for property investment.
Australian is experiencing its lowest interest rates ever, with the Reserve Bank cash rate currently sitting at 1.5 per cent and competitive mortgage rates between three per cent and four per cent.
Despite the economic benefits of this environment, rates are widely expected to rise over the next few years, following the recovery of the American economy and rate hikes in the US. As Australian investors are predominantly tied to variable rate loans, any increase would quickly fees into the cost of servicing mortgages, especially for investors who are using negative gearing and hence depend on income other than their rent to service the mortgages.
In addition to this interest rate risk, Australians who hold property assets face a myriad of other structural risks in coming years. These include changes to the tax treatment as housing affordability moves up the political agenda, restrictions on the movement of capital by international investors (especially those based in China) and property-specific risks such as repair bills and loss of rent.
In terms of their equity holdings, historically Australians have been heavily invested in the domestic banking sector due to its high visibility, perceived strong track record (despite the GFC) and size relative to the rest of the Australian market.
However, institutions in this sector are, by nature, highly interlinked through mutual lending and similar profit drivers, such as margins on mortgage lending.
The effect of this is that the conventional wisdom of spreading investment funds across several shares will do little to reduce risk if individuals hold too many banks shares and term deposits. During the 2015/16 financial year there was a strong correlation between the value of household investments in direct equities and the performance of the stocks in the banking sector, which highlights the number of eggs that have found their way into the same basket.
Michael Berg is a senior consultant at Rice Warner. The article was first published on the Rice Warner website on April 19.