Here's a sample of what cooling house prices can do to spending

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Today’s retail sales data and house price data offer a glimpse of what the Reserve Bank of Australia has been warning about.

There are signs that households saddled with record debt to fund their housing aspirations are starting to cut back on spending as house prices begins to cool.

That is inline with the observations of the central bank. The RBA worries that surging debt has weakened the resilience of the economy to combat future shocks.

Households could slash their spending in response to any shock, meaning “an otherwise manageable downturn could be turned into something more serious,” Reserve Bank of Australia governor Philip Lowe said last month.

While overall retail sales in Australia grew by 1.0% in April in seasonally-adjusted terms, coming in well above forecast growth of 0.3%, a closer look at the data reveals a different picture as this chart shows.

New South Wales recorded just a 0.1% growth in retail sales in April at a time when house prices in Sydney went nowhere. Queensland had a strong run with a revival in commodity prices helping.

And CoreLogic has already released price changes for May that show sharp falls for Sydney and Melbourne. Sydney had its first monthly fall since December 2015, according to the data.

ANZ economists Jo Masters & Daniel Gradwell said they expected the retail sector to face a number of challenges.

“Households have become more cautious about their personal finances amid weak wage growth, high household debt, slowing house price growth as well as rising energy bills, out of cycle mortgage rate hikes and the proposed increase to the Medicare levy.”

May retail sales data is due July 4.

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