- Australian home prices have fallen for 12 consecutive months, with declines at the top end of the market now spreading to lower valuations.
- At a time when wage growth is weak and household savings levels are extremely low, some believe this could lead to a slowdown in household spending on a reduced wealth effect. Others, however, suggest strong employment growth should be able to offset any potential impact from falling home prices.
- Recent new car sales data suggests households are sensitive to changes in home values. The question now is whether that points to a possible slowdown in spending on day-to-day items?
Australian home prices have fallen in each of the past 12 months.
Starting with the most expensive end of the market, largely reflecting falls in Sydney and more recently Melbourne, declines are now starting to spread to less expensive markets, according to analysis from Morgan Stanley.
At a time when wage growth still remains well below normal, and with the proportion of money being saved by households nos sitting at the lowest level since before the GFC, it has some commentators concerned that it could lead to a slowdown in consumer spending, and with it Australian economic growth given it accounts for nearly 60% of GDP.
Housing is, after all, the largest store of wealth for the vast majority of households.
Will recent declines lead to more cautious spending by households, reflecting a reduced wealth effect?
Not everyone thinks it will, pointing to still strong levels of employment growth and a modest pickup in worker wages as two factors that will help to cushion the blow to household balance sheets from lower property prices.
Others note that household spending was not all that strong in the period when property prices were rising, leading to the assumption that if higher prices didn’t encourage spending back then, falling prices now are unlikely to lead to consumers cutting back.
Indeed, if Australia’s latest GDP report was anything to go by, falling home prices didn’t dissuade people from hitting the shops in the June quarter with household consumption helping to fuel a strong increase in economic activity.
While that suggests there’s little to fear from a consumer-led economic slowdown as a result of falling home prices, this chart from Macquarie Bank suggests there is.
It shows the relationship between annual movements in house prices and the level of new car sales, often the second-most expensive item that households will purchase behind their property.
While not perfect by any stretch, it’s clear that more often than not, the direction home prices move is often followed by new car sales.
At face value, that suggests households do have some sensitivity to changes in wealth levels, hinting why some believe the recent downturn could extend further to spending on day-to-day items as well.
After a strong June quarter, Australian retail sales were flat in July with spending in discretionary actually falling modestly over the month.
Following that disappointing result, that suggests there’ll be plenty of eyes on Australia’s August retail sales report when it’s released on Friday.
Economists are expecting a modest rebound of 0.3%, fitting with the broader trend of soft retail spending over the past few years.
However, another weak result would certainly raise some eyebrows, particularly given the increased attention house prices have been receiving in recent months.
One month does not make a trend, but two potentially will.
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