With cost of living rising high, homeowners could soon be facing cash problems despite their personal wealth. Let's break down how that works!
Aussies have long enjoyed low interest rates in the property market.
Many Aussies are house rich but cash poor.
It's important to understand the trade-off between liquid and illiquid assets.
It probably isn’t much of a surprise to hear that Australians are “house rich” but “cash poor”.
With high cost of living and the subsequent rise in interest rates in Australia, homeowners could be facing cash problems despite having solid personal wealth.
So, how does that work?
Property prices in Australia have been rising faster than Marvel's been pumping out new movies. In fact, house prices rose by 23.7% last year, which is the fastest annual pace on record.
Australia has been in a property boom since the early 2010s, aka the property market has been absolutely popping since then.
The main reason for this was that interest rates were falling and it meant that people could take out mortgages comfortably to buy a property… or many properties.
Fast forward to 2022 with our rising cost of living. The RBA or Reserve Bank of Australia has been tackling cost of living by upping the cash rate consecutively since March from 0.1% to 3.10% this month.
Because of this, interest rates have gone up, putting a tonne of pressure on the pockets of mortgage holders, and making many asset rich but cash poor.
Being asset rich but cash poor means you have wealth in assets like property but not enough cash for your spending and saving.
Assets are great for building wealth since they are worth a heap and have the potential to grow in value - but they’re not very liquid. This means it’s hard to turn them into cash quickly. For example, you can’t just sell 10% of your house and recoup the cash to buy stuff.
While cash doesn’t grow in the same way assets do, it’s the most liquid asset you can get. It’s pretty simply why - you can use it however you want, like spending thousands on collectible Cheetos if that’s your thing.
Don’t worry, no one’s judging.
As the interest rates continue to rise, many Australians with variable mortgages have seen their monthly repayments jump quickly. This means they will need to use more of their income to keep on top of their mortgage, and have less left over for other expenses or to save for emergencies.
When it comes to investing, you want to make sure that you understand the difference between liquid assets (ie. cash) and illiquid assets (ie. property). This will help ensure you’ve got enough money in the piggy bank for day to day expenses plus a contingency for the future.
There’s always a trade off between one and the other, but understanding the pros and cons of both can help you strike the right balance.
You know, day to day needs like those collectable Cheetos.
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