This analyst thinks fears of falling home prices hurting Australia’s economic outlook are overblown

  • The outlook for household spending remains the greatest domestic uncertainty facing the Australian economy at present.
  • On top of high levels of debt, weak wage growth, slowing employment and low household savings levels, some believe falling home prices could lead to a pronounced pullback in spending.
  • HSBC says household incomes, rather than house prices, play a key role in determining the outlook for spending levels, and sees brighter days ahead for family finances.

Australian households, as a whole, are heavily indebted.

At a time when wage growth remains weak, savings levels are low and employment growth is slowing, it has more than a few concerned about the vulnerability of households to sustain spending levels in the future, increasing the risk of a pronounced economic slowdown, or worse, given it accounts for more than half of the Australian economy.

While the Reserve Bank of Australia (RBA) appears less concerned about the outlook for household consumption, at least compared to earlier this year. It noted at its August monetary policy meeting that a pick-up in household disposable income over the past year, coupled with prior and future income tax cuts, another large increase in Australia’s minimum wage rate at the start of July and an expectation that wage growth will continue to accelerate, had “reduced some of the uncertainty around the outlook for consumption”.

However, despite increased confidence among policymakers, few disagree that of all the domestic factors facing the Australian economy at present, none are as uncertain than the outlook for household spending, especially at a time when home prices, the largest store of wealth for most families, are falling.

According to latest data released by CoreLogic, Australia’s median home price fell for a 10th consecutive month in July, leaving the decline over the past 12 months at 1.9%.

In July alone, the median price fell 0.6%, the largest decrease in nearly seven years, largely reflecting declines of 0.9% and 0.6% respectively in Melbourne and Sydney, Australia’s largest and most expensive housing markets.

Given over 10 million Australians alone live in these two cities, and given they account for around 60% of Australia’s total housing wealth courtesy of higher-than-average property valuations, many are concerned that on top of other headwinds facing household spending, falling home prices could be the proverbial “straw that breaks the camel’s back”, leading to a potential slowdown in not only spending but also economic growth.

Will the reduced “wealth effect” from falling home prices wreak havoc on the Australian economy?

Although no one knows the answer to that question — trying to read the psychology of households, and their future actions, is close to impossible — Paul Bloxham, Chief Australia and New Zealand Economist at HSBC, isn’t all that concerned about a housing-led slowdown in spending.

Based on what’s been seen in recent years, when higher home prices acted to boost household wealth levels, Bloxham says there was little evidence to suggest it helped to boost spending levels.

“If changes in wealth were a major driver of consumption, then spending surely would have been much stronger in recent years,” he says.

However, as seen in the chart below from HSBC, even with stronger home prices helping to boost household wealth, it did little to boost household consumption over this period.


“Over the past six years, household consumption growth has been steady and solid, although not as strong as it was prior to the Global Financial Crisis,” Bloxham says.

“In real terms, consumer spending has averaged 2.6% year-on-year, down from an average of 3.7% from 2000-2010. In nominal terms, the story is similar, with spending growth averaging 4.5% since 2011, down from 6.6%.”

If increased wealth levels didn’t boost consumption when home prices were rising, it does raise the valid question as to whether falling wealth levels as a result of lower home prices will suddenly lead to a slowdown in spending levels?

But what about the decline in household savings seen since the end of the GFC, something that could reflect that households, facing weak income growth, felt confident enough to reallocate money away from saving to spending given higher home prices? With the wealth effect from home prices now reversing, could that lead to a reversal of those trends with households choosing to save more and spend less?

Some believe it will, but Bloxham disagrees.

“Growth in income has been consistently slower than growth in household spending in recent years,” he says.

“By definition, this has meant that the household saving rate has been falling as households divert a larger and larger share of their income to spending.

“Some observers point out that this could be evidence of a positive wealth effect, which might strengthen the case that the end of the housing boom could deliver a negative wealth effect.

“Again, we do not think so.”

In his opinion, the continued decline in the household saving ratio has been driven by the trends in the mining states, Western Australia and Queensland.

“This has been especially stark in Western Australia, where much of the initial boost to incomes from the mining investment and commodity price boom appears to have been saved rather than spent and, subsequently, when income growth slowed households reduced their saving rate to support consumption,” Bloxham says.

Rather than changes in household wealth levels being the predominant driver of household spending, Bloxham says it’s changes in household income levels that play a far more significant role, pointing to the chart below as evidence.


Helping to explain why he, unlike others, isn’t concerned about recent weakness in the housing market leading to pullback in spending, Bloxham sees brighter days ahead for household finances.

“Our central case sees continued solid jobs growth tightening the labour market further and driving a modest lift in wages growth. There are also already some tell-tale signs that wages growth is picking up, with firms reporting that it is getting harder to acquire skilled labour,” he says.

“These forces should support a pick-up in growth in household disposable income and underpin continued solid consumption growth.

“Next week’s Q2 GDP print is expected to be strong and show that household consumption has been a key support for growth recently.”