Household dwelling assets have grown much faster than GDP. Most of this is the result of price rises: average house prices went from two to four times household disposable income between 1980 and 2010.
This was a global trend and as such it was probably driven by common global forces rather than local events - not say negative gearing and not Aussie Home Loans. The two most commonly cited global forces are the fall in inflation the removal of financial market distortions which had restricted the supply of credit to many households.
Household borrowing was constrained during the post-war period so the removal of those constraints, combined with an ability to service larger loans, induced the large increase in global house prices.
Financial institution behavior played a secondary role but the fall in lending margins (cheaper credit) and the launch of new products would have helped boost volumes.
Compulsory superannuation is a very large distortion in the economy and by shifting funds from consumption into savings it shifts economic value from other sectors into the financial sector. While the wedge between total financial assets and total housing assets in Figure 2 is not as big as the uplift in housing assets, the wedge is mainly driven by superannuation and is clearly growing quickly.
The superannuation pool is now about $1.7 trillion, a bit bigger than GDP, and the average margin paid is around 1.3 per cent of funds being managed. So superannuation has added close to 2 per cent of GDP to the measured size of the financial sector.
However, comparisons with other countries where retirement savings are often managed within corporations are difficult. We do not know to what extent retirement savings in other countries are being measured within their corporate sector (manufacturing, agriculture etc) rather than in the financial sector. It is also clear that in a number of countries corporate schemes are unfunded, so the liabilities are being passed to the future.
The astounding growth in markets based activity since 2005 is clear from Figure 2.
Government action has driven equity market growth. Businesses which were previously government owned constitute some 20 per cent of the market’s capitalisation. Tax changes – franking and the removal of transactions taxes – also played a role.
In other markets, volumes have increased by even more than in equity markets. This appears to have been driven purely by individual preferences without significant market distortions. The floating of the currency shifted risks onto individuals and created the need for the insurance provided by hedging through markets.
Costs, margins and wages
Since the GDP-contribution of any sector is measured effectively by the sum of the wages it pays plus the profit it makes, the next issue in trying to address whether the sector is too big is to ask whether margins and wages are excessive.
Normally when the demand curve for a service increases, we see supplier margins rise. Surprisingly, bank margins have fallen quite consistently with net interest margins roughly halving since the 1990s and bank fees per asset funded also falling.
The superannuation sector has also seen a (gradual) reduction in fees - of about 2 basis points per year across all fund types. Again this is somewhat surprising given the growth in demand. With forecast restructuring and scale in the sector, experts have argued fees could come down further.
Fees in markets have also fallen. The declines in the trading fees for equities and currencies have been even more notable than bank or superannuation fees with retail equities margins for example falling from over 2 per cent per trade in the 1980s to flat fees of about $20 on a typical transaction. Similar reductions in fees for on-market trades have occurred across a wide range of products.
Moving away from the consideration of the profit margins of institutions, the other main component of sector value added is wages. The Figure below comes from a major bank annual report. It shows how much more than wages pre-tax profits have grown.
Figure 3: Major bank: profits, wage bill and unit wage growth