What will households do with their warchest of money?
Today, I’m going to show you what I think will be the primary driver of the boom in 2021 and beyond.
What I’m going to show you is that households have actually come out of 2020 sitting on a massive warchest of money.
I don’t think anyone saw this coming.
And I know a lot of people won’t believe it. For a lot of people, COVID has been incredibly tough. People have lost their jobs. Businesses have closed.
For many individuals, it’s been challenging to say the least.
However, while that’s true for many individuals, when you look at the Australian household sector overall, household incomes have actually gone up!
I know, right? Who would have thought?
Basically, it looks like the government may have over-cooked things with its stimulus payments.
They gave away too much money.
Now I’m not saying that’s a bad thing. JobKeeper and the JobSeeker Supplement helped underwrite confidence in the economy when things were at their darkest. Who knows what things would have looked like without them.
But with the benefit of hindsight, they have had the accidental effect of juicing household incomes.
And that’s because wage and salary income held up much better than expected:
This comes from CBA’s internal data, and it shows that after modest falls in income between March and July, salary income actually started growing at a decent clip, and by the end of the year, was getting back to its long run average of 4% a year.
And while wage income held up better than expected, government support payments came in hot. That’s the red bars on this chart, again from CBA:
So what that shows, when you put them together, is that pre-Covid, household income was growing at you usual 3-4%, and by year end, it was growing at 7-8%.
That’s a big difference!
This income boom was evident in the September quarter national accounts. Household disposable income grew about 4% in the both the June and September quarters – that’s an annual clip of around 14%! You can see the impact of government payments – the orange bars – in this chart here.
Households took that income and went on a spending spree, jumping up over 10% in the quarter in most states.
However, even with a spending spree in full effect, households were so flush that they were still able to put a sizeable bit of money away, and the savings ratio boomed!
The CBA savings indicator – which is more timely and measures cash in their deposit accounts – tells a similar story, with households sitting on a phenomenal warchest of money.
So long story short, households are flush.
What they go and do with this money is an open question. They might keep saving it. They might go and spend it.
Or, they might realise that they’re sitting on a house deposit now, and look to invest it.
And why wouldn’t they invest it?
Right now, with record low interest rates, Australian’s interest payments, as a percent of disposable income, has fallen to the lowest level in 25 years!
So put that together and you have households sitting in a powerful position.
They’re sitting on a massive warchest of money, while the cost of borrowing, both in absolute terms but also in relation to their disposable income, has almost never been lower.
To me, that points to massive pent-up demand for housing assets.
And it’s this demand that will be one of the primary drivers of the Roaring 20s – the boom that will kick of tentatively in the first half of 2021, but with a vengeance in the second half of 2021 and beyond.