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Speaker 1: Welcome to Ask Fear and Greed, where we take your

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Speaker 1: questions and do our best to answer them. Oh, Michael Thompson,

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Speaker 1: and good afternoon, Sean.

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Speaker 2: Aylmer, Good afternoon, Michael.

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Speaker 1: Sean great question today. It has come in from Rebecca

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Speaker 1: on LinkedIn. LinkedIn is a great place to ask these questions,

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Speaker 1: as any social media platform really, Facebook, Instagram or fearangreed

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Speaker 1: dot com dot au. But Rebecca wants to know. She says,

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Speaker 1: can you explain the wealth effect? We've had house prices rising,

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Speaker 1: but people are spending less. So does that mean the

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Speaker 1: wealth effect doesn't always work?

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Speaker 2: H interesting question. Now there is empirical evidence that the

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Speaker 2: wealth effect does work. So what we're talking the wealth

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Speaker 2: effects a really simple concept. When people feel wealthier, they

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Speaker 2: spend more. I remember there was a research report out

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Speaker 2: of the Reserve Bank a few years ago and basic

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Speaker 2: he said, there's this positive and stable relationship between people

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Speaker 2: feeling wealthier and consumption. And so if you look at

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Speaker 2: how much they spend on motor vehicles they call durable goods,

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Speaker 2: so it might be fridges and washing machines and TVs

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Speaker 2: that sort of stuff, and then other discretionary spending. When

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Speaker 2: people think that they're wealthier, they spend more money on

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Speaker 2: those types of things.

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Speaker 1: So is the main kind of source though, of that

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Speaker 1: perceived wealth typically house prices.

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Speaker 2: It's always thought about as house prices, but there's lots

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Speaker 2: of other things as well. So the two main things basically,

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Speaker 2: if you've got a job, you spend money. That's actually

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Speaker 2: the main thing. It's not the wealth effect, but it's

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Speaker 2: just the reality. When the value of your house is rising,

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Speaker 2: you feel wealthier, so you are more likely to spend.

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Speaker 2: But it's a bit the same when you feel good

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Speaker 2: about your car and the price you have in your house,

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Speaker 2: and that you actually spend more money. So the question

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Speaker 2: is about rising house price and whether that means wealth

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Speaker 2: effect doesn't work. I think the wealth effect still works,

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Speaker 2: but what it does in higher interest rates has mitigated

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Speaker 2: the effect of the wealth effect. So we have rising

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Speaker 2: house prices, but interest rates are kind of getting in

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Speaker 2: the way of people feeling better about themselves. Now little

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Speaker 2: kind of caveat to that. People who own their home

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Speaker 2: not paying interest on it. They have all said times

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Speaker 2: are great, and you see all those self funded retirees

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Speaker 2: and that they're coming out and saying, hey, this has

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Speaker 2: been as good as we've had it. It's a people

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Speaker 2: who actually don't own their home.

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Speaker 3: Even if their house price is going up, they've still

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Speaker 3: got a mortgage of five hundred thousand dollars a million dollars.

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Speaker 3: They're the ones who are really struggling a bit. So

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Speaker 3: the wealth effect is still helping those who own their

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Speaker 3: own home, but it's not what's being mitigated by higher

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Speaker 3: interest rates for those who don't fully own their own home.

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Speaker 1: Gotcha. And I suppose kind of food prices rising and

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Speaker 1: power bills rising, and insurance premiums and everything going up

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Speaker 1: as well, they all kind of work in that direction

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Speaker 1: as well.

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Speaker 2: Yeah, that's right, if they work to mitigate the benefits

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Speaker 2: of the wealth effect.

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Speaker 1: Ah, I think I understood that, And I look, I

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Speaker 1: am sure. I don't want to speak for Rebecca, but

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Speaker 1: I'm going to and say I think you explained that

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Speaker 1: one well and I understood it. So thank you Sean

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Speaker 1: for tackling that one. Yeah, most welcome, and thank you

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Speaker 1: Rebecca for the question. Remember, if you've got something that

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Speaker 1: you'd like to know, then send through your question on LinkedIn, Instagram, Facebook,

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Speaker 1: or at fearangreed dot com. Dot au doesn't need to

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Speaker 1: be about the economy. It could be about anything to

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Speaker 1: do with business. It would really be about anything at

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Speaker 1: all if you'd like testus. All right, I'm Michael Thompson

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Speaker 1: and this is us fear and Great