The extraordinary developments in global financial markets over the past couple of months have, understandably, undermined households’ confidence in their finances. This has occurred around the world.
Households have seen incredible volatility in financial prices. Daily movements in share prices of several percentage points have become the norm. Share prices have fallen sharply around the globe. In Australia, the share market is down about 40 per cent in 2008, resulting in negative returns in most individuals’ superannuation funds.
The difficulties in global interbank markets which had existed since August 2007 took a dramatic turn for the worse last month. The crisis, which had until then been largely confined to wholesale markets, spilled over into a severe loss of confidence among retail investors in financial institutions. Governments around the world have been forced to offer wide-ranging guarantees on banks’ liabilities. And, to top it off, some commentators are predicting sharp falls in house prices here in Australia.
This paper looks at the state of household finances, focusing on three key areas:
• household income;
• household balance sheets; and
• the housing market – in particular, is the Australian housing market going to go the same way as the US market?