Wealth Effect in Australia 2025: Impact on Spending & Economy

When house prices and share portfolios soar, Australian wallets tend to open wider. But is the so-called ‘wealth effect’ really making us richer, or is it just a financial illusion?

What is the Wealth Effect and Why Does It Matter in 2025?

The ‘wealth effect’ describes how people spend more when the value of their assets—like homes and shares—increases. In 2025, with Australia’s property market rebounding after recent corrections and the ASX reaching new highs, the wealth effect is in sharp focus. This psychological phenomenon isn’t just theory; it’s having real impacts on household spending, retail sales, and even government policy.

Recent Reserve Bank of Australia (RBA) research shows that for every $100,000 increase in household wealth, annual consumer spending can rise by $2,000 to $3,000. With national property values up 7% year-on-year and superannuation balances swelling, millions of Australians are feeling more flush—even if their income hasn’t changed.

• Property values: Median house prices in Sydney and Melbourne have climbed back to record territory in early 2025.
• Superannuation: The average super balance for Australians aged 35-54 has surpassed $200,000, buoyed by strong market returns.
• Share market: The ASX200 broke through the 8,000 mark for the first time in February 2025.

How the Wealth Effect Shapes Everyday Decisions

Feeling wealthier—even on paper—can have surprising ripple effects across the economy. Australians are more likely to upgrade their cars, renovate their homes, or splash out on holidays when their property or share portfolio is up. In 2025, this effect is visible in:

• Retail spending: Department stores and homewares retailers report double-digit growth, with Harvey Norman and JB Hi-Fi citing ‘asset-driven confidence’ in recent sales updates.
• Renovation boom: ABS data shows a 14% rise in home renovation approvals since mid-2024, as homeowners tap into increased equity.
• Travel and leisure: Flight Centre and Qantas both noted above-forecast bookings for the 2025 Easter and winter holidays, linked to positive household sentiment.

Financial planners note that many Australians are also more willing to take on new debt—such as car loans or personal loans—when their perceived net worth climbs. This can create a feedback loop: more spending boosts the economy, which in turn supports asset values.

Policy Shifts and the Double-Edged Sword of the Wealth Effect

The 2025 Federal Budget and recent RBA commentary both acknowledge the wealth effect’s power. With inflation still above target but wage growth lagging, policymakers are watching asset-driven spending closely. The government’s decision to keep the Stage 3 tax cuts, coupled with targeted cost-of-living relief, aims to balance the boost from asset growth with support for those left behind by rising prices.

But there’s a catch: the wealth effect can widen inequality. Not everyone owns property or has large super balances. Renters and younger Australians may feel left out as asset owners enjoy windfalls, a divide highlighted by the Productivity Commission’s 2025 report on intergenerational equity.

Key policy moves in 2025:

• Super changes: The government is reviewing concessional tax treatment on high super balances, aiming for a fairer system as balances balloon.
• First Home Buyer schemes: Expanded federal guarantees and stamp duty concessions to help younger Australians access the property market.
• Financial literacy drives: ASIC is rolling out new education campaigns to help Australians understand the difference between paper gains and real wealth.

Making the Wealth Effect Work for You

For Australians, the wealth effect is a double-edged sword. It can encourage positive spending and investment, but it’s vital to distinguish between paper wealth and cash flow. Experts recommend:

• Reviewing your household budget before making large purchases based on asset gains.
• Considering diversification—don’t rely solely on property or shares for your net worth.
• Keeping an eye on interest rates and borrowing costs, which can change quickly if the RBA acts to rein in inflation.

Above all, remember that markets can move both ways. The wealth effect is powerful, but prudent money management is always in style.