New research suggests the risk of a housing-led spending slowdown in Australia are growing

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  • Whether falling home prices will lead to a spending slowdown in Australia remains uncertain.
  • A new survey from ME Bank suggests many Australians are concerned about the impact of the downturn in the housing market. Nearly 75% plan to be “more careful with their money in the future”.
  • Concerns were most acute among those who bought a home at or near the top of the price cycle.

One of the great unanswered questions relating to Australia’s economic outlook is how homeowners will react to falling property prices, particularly when it comes to spending levels.

Some aren’t concerned about the reduced wealth effect on household balance sheets, and the hence the potential for a spending slowdown, pointing out that stronger labour market conditions should help to boost income levels should employment and wage growth continue to increase.

Others, however, aren’t convinced recent strength in the jobs market will be enough to see households sustain their spending levels, especially given both employment growth and spending levels have tended to soften in the past whenever home prices have weakened for a an extended period.

Many economists expect the Sydney and Melbourne-led housing market downturn — already 14 months old — will continue for some time yet, adding to unease over the outlook for household spending, the largest part of the Australian economy at over 50%.

While we won’t get data on household consumption until later this week when Australia’s Q3 GDP report is released, given weak retail sales and falling motor vehicle sales in the September quarter, it suggests the impact of falling home prices in some parts of the country is already having an impact on discretionary spending patterns.

It’s only early days, but it appears that households are becoming more cautious towards spending despite consumer sentiment still sitting an above-average levels.

A new survey of 1,500 Australians from ME Bank suggests the risks of a housing-led spending slowdown are building, especially for those who bought at the top of the price cycle.

“The key finding is that those who bought property in the past three years are significantly more worried about the impact of prices falling,” says Andrew Bartolo, ME’s Head of Home Loans.

“In a sign that ongoing price falls may hit consumer spending, 49% of respondents said falling prices made them feel less wealthy, while 73% said they would be more careful with their money in the future.”

Given the prospect of negative equity, particularly at a time when many forecasters expect that values will continue to fall, the proportion of respondents who said they were worried about the price downturn was significantly higher among those who purchased a home within the past three years.

ME Bank

That cohort also expressed more concern about losing money on their property, being in negative equity and regret about what price they paid compared to those who bought more than three years ago.

Although concerns were most acute among those who purchased a home at or near the highs, almost half of those who bought beyond three years ago also said they were worried about falling values, with over a third also expressing concern that they could lose money on their home.

While this is only one survey, the results underline why some are concerned about a change in consumer behaviour as a result of the housing downturn, especially at a time when wage growth remains weak and savings levels are low.

Given that outlook, it means Australia’s economic fortunes in the years ahead will be largely determined by what happens in the labour market.

Right now, things are looking fairly optimistic on that front with unemployment at six-year lows, employment growth still strong and wage growth slowly picking up.

However, should only a small proportion of households begin to trim their spending levels as a result of the housing downturn — as the ME survey suggests — that could spillover into the broader economy, potentially creating headwinds for economic activity and employment growth.

That, in turn, could also see the current housing market correction turn into something more significant.

There’s a lot of “ifs” and “buts”, certainly, but the risks of falling home prices spilling over into other parts of the economy cannot be simply dismissed.

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