- Australia’s housing downturn has extended to a 13th month, with further falls expected.
- More market experts – including the RBA – are now turning their attention to how a negative wealth effect from falling house prices could drag on consumption growth.
- We’ve highlighted five indicators that will be worth monitoring in the months ahead to gauge the extent of a housing-linked consumption crunch.
Recently, a steady stream of economists have downgraded their outlook for the major east coast housing markets.
If that’s the case, house prices in Sydney still have a way to fall from their current decline of 7-8%.
And over the weekend, national auction clearance rates fell below 50% for the seventh straight week. This week’s finalised result looks set to be the lowest yet — a trend which has historically coincided with falling house prices.
So in addition to low wage growth and high household debt, the effect of falling house prices may also pose a threat to the consumption outlook.
Parts of economic growth like commodity prices and trade often grab the headlines but it is consumption – largely people and business buying and selling stuff to each other each day – that makes up the vast majority of economic output, constituting over 55% of Australia’s GDP.
In each of its recent policy announcements, the RBA has referred to the outlook for domestic consumption as a “continuing source of uncertainty” for the economy.
And in this month’s statement, the RBA also specifically noted that “some asset prices have declined” for the first time.
That could be a possible indication that the central bank is monitoring how well consumers are navigating a negative “wealth effect” from falling house prices. As people see the value of their assets fall, they may reduce their spending.
In view of that uncertainty, we’ve highlighted five trends that will be worth watching to assess the impact from falling house prices on the broader economy.
Big-ticket items for houses are holding up
Purchases of products such as fridges and other household goods are often closely linked with moves in house prices.
Morgan Stanley’s analysis of last week’s retail sales data showed demand for housing-linked products was “relatively resilient” in September.
Sales growth in furniture/furnishing products was flat in the month, following a rise of 2.4% in August after a 2.6% fall in July.
In addition, recent consumer sentiment surveys show households have become more pessimistic about purchasing large household items, despite the positive flow-on effects from a strong labour market.
“Sluggish wage growth, high levels of debt and decreasing house prices are likely constraining sentiment in this regard,” ANZ economist David Plank said.
Private car sales are tanking
Data from the Federal Chamber of Automotive Industries showed car sales in Australia fell for the second straight month in October.
The falls were coming off a high base — 2017 was a record year for car sales — but there was evidence in the data which indicated some negative spillover effects from falling house prices.
Sales to private buyers fell by 6.6%, well in excess of sales to businesses and government departments.
And the only state where car sales rose was Tasmania, which has also been the country’s best-performing property market.
Sales in NSW and Victoria — the two states where house prices are falling the fastest — fell by 9.2% and 4.2% respectively.
The uptake of private health insurance has stopped, and even declined a bit
Although not directly tied to the housing market, a shift in this area could be seen as an alternative leading indicator on household finances and cost-of-living pressures.
Data to the end of June shows that in overall terms, the number of Australians with private health cover has levelled out after steadily rising for years.
That may be a partly a function of higher prices — figures in January showed private health insurance premiums are rising at 3.95%, which is almost double the rate of wages growth and inflation.
Tying the data through to where house prices are falling fastest, the number of people insured in NSW and Victoria fell by 0.5% and 0.4% respectively in the June quarter — in line with the national average.
The latest data from APRA showing private-health trends for the September quarter will be released on November 15.
Retail sales have been shaky
In addition, sales volumes in the September quarter only rose by 0.2% (forecast 0.4%).
More broadly, retail as a sector has lagged other industries for a number of years amid changing consumer trends and heavy price competition.
But an extended run of weakness would provide evidence that the fallout from a negative wealth effect is starting to bite.
In view of that, the upcoming Christmas period will provide an important indicator of how well household finances are holding up.
Without a “decent lift” in sales, “it may be a signal that negative wealth effects from falling dwelling prices are weighing on consumer spending,” CBA’s Kristina Clifton said.
Consumer confidence is healthy but house prices could weigh on it
Along with hard data points, qualitative measures of consumer sentiment will also be worth watching over the coming months.
The two most established confidence gauges are ANZ’s weekly confidence index and the monthly scorecard from Westpac.
ANZ’s measure is subject to weekly volatility from once-off events such as political shocks, but more broadly the reading has retreated from its mid-year high.
Westpac’s monthly print for October showed optimists still outnumbered pessimists for the 11th straight month.
But responses to the state of the housing market stood out. In particular, expectations for future house prices fell to the lowest level since 2009, with a particularly sharp fall in Victoria.
For now, both gauges are tracking near their long-run average amid continued strength in the labour market. But both measures will be worth monitoring if house prices continue to fall.
ANZ’s weekly index is released every Tuesday, while the monthly reading from Westpac comes out this Wednesday, November 14.
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