Thursday, October 16, 2008

Paul Frijters observations on the financial data + measures of decline in Australian personal wealth

Paul Frijters had a rather useful (and simple) piece in Club Troppo, The end of the party or the start of a new one? Observations on the financial crisis.. The discussion in comments is worth reading as well.

Jessica Irvine had a piece in The Sydney Morning Herald reporting on the latest official figures on the decline in Australian personal wealth. She does not report the source of the data, nor have I been able to find it to check.

Subject to this qualification, Jessica reports that average personal wealth has fallen by $12,000 (3.6 per cent) from its peak in September last year to just more than $237,000 at the end of June. This is the largest decline since the recession of the early 1990s. However, as at end June, personal wealth was still up 94 per cent over the decade, 29 per cent over the previous five years. but follows an increase of 94 per cent over the previous decade.

Richard Salmons in The Age quotes Saul Eslake as saying that "the stark difference between the relatively buoyant Australian economy and the serious economic problems in the United States was a result of the growth in Australians' assets in the past three years. Since March 2000, when the US share market peaked, Australian households had increased their wealth - net of debt - by 28 per cent. By contrast, the wealth of American households has fallen by 11.7 per cent, as the US market, for the first time since World War II, retreated for a third consecutive year. "

Salmon's also notes that Australian superannuation funds lost 7.2 per cent of their value last year - their worst result in 28 years.

Just for the record, there are 808,604 Australians aged 65-69, 1,064,370 Australians aged 60-64. These are the groups that will be hit double by fall in superannuation values on one side, interest rates on the other. The fact that the share boom created well above average returns in recent years is small consolation for those who did not exit on the higher returns and who have been counting on their lump sum.

The overall effect of the decline in values is beyond the scope of this post. However, it does have major implications for the million or so Australians who were planning retirement in the next few years.

I think that the key point at this stage is that the numbers show why the decline in asset values is having such impacts.

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