The impact of falling house prices on the Australian consumer

3 min read

One of the underlying drivers of property price inflation over the five years to late 20171, has been due to an increase in demand. While this is one of the underpinning causes, this increase has also been supported by a prolonged period of low interest rates, the availability of ‘easy finances’, overseas investors and favourable tax treatment through negative gearing.

The origins of the recent cycles has been mapped to more recent growth in the Australian population, through permanent and temporary immigration, outweighing supply which has been slow to adjust. Valuations had also reached record levels in late 20172, which is where we began to see the current market correction.

The prospect of capital loss, however, has seen buyers avoid entering the property market during its most recent period of downturn. As of April 2019, house prices nationally were down -7.2%3 for the year. Generally speaking, the now lower cost of property is expected to attract demand from buyers, as house prices become more affordable, stabilising the market. Some of the impacts of changing house prices, both up and down, may be explained through the wealth effect.

So, what is the wealth effect?

The wealth effect is the relationship between household wealth and consumption. Simply put, it is the ideas that when you feel wealthier, you are more likely to spend on purchases and less likely to save.

Household wealth is measured as the household’s assets minus their liabilities which can be made up of financial assets, including bank deposits, equity holdings, superannuation balances, and non-financial assets, including housing and durable items. Household liabilities are commonly made up of mortgages and other loans. Given that the components of wealth can move together, it’s difficult to separate and determine their individual effects on consumption4

Consumption can be described as a large demand, which can affect economic activity. When household wealth increases, Australian consumers tend to spend more on automobiles, holidays and other forms of fun. As household wealth falls, consumers may feel less confident to purchase non-essential items, as there is a lessening of their “safety net”. An example of this is being more willing to spend on discretionary items, e.g. entertainment, after receiving your periodical pay, because you feel “cashed up”. On the flip side, at the end of your pay cycle, you may feel more reluctant to spend.

The impact of falling house prices

Australian policymakers have linked lower household spending to the effect of falling house prices, which can pose concerns for the nation’s growth through the knock-on effects of consumer spending. The Reserve Bank of Australia (RBA) closely watches this negative wealth effect in its assessment of the economy, which then forms part of our monetary policy direction.

Against the average Australian household’s balance sheet, housing makes up a large proportion of household wealth, which means that any change in household value can lead to an impact on spending. ABS data for the December 2018 quarter showed land and dwellings accounted for 66.2% of household net worth[4]. In the same period, a reported 2.1% decrease in household net worth was driven predominately by real holding losses on land and dwellings ($170.8bn), followed by financial assets ($141.2bn). 

Given buyers can hold off entering the market during periods of falling house prices, turnover in the housing market is at very low levels. Households typically purchase housing-related goods and services before and after a home purchase and, because of this, are likely to be associated with increased consumption.

The March retail report5 indicated annual sales growth lifted from 3.2% to 3.5%, but underpinning the gain was higher pricing rather than sales volumes, which were materially weaker. The automotive sector has similarly been impacted by the withdrawal of spending, with year to date sales figures for April 2019 decreasing 8.1% on the same period in 20186.

Keeping it in perspective

While the negative wealth effect of house price declines could have impacted consumer spending, increased business investment, exports growth, and a strong labour market continue to support Australian economic activity. However, some uncertainty lies in how we continue to manage slow wage growth and high levels of household debts.

Sentiment indicators are encouraging with the overall BT Financial Health Index7 reporting a stable +8 points for the March 2019 quarter, unchanged from the December 2018 quarter. Since the June quarter last year, the Index is higher by 2 points. Driving the improved sense of financial wellbeing over the longer term has been a lessening concern about house prices, measured to have fallen to 5.6 points in the March 2019 quarter, from 6.1 points previously (measured on a scale where 0 is ‘not at all concerned’ and 10 is ‘extremely concerned’). Looking closer, larger declines in concern levels were evident for those with lower household incomes which lie in the typical range for first home purchases and current renters.

Although more recently we are seeing indicators of the ‘bottoming out’ of the decline in house process, should the property market continue its corrective direction, the effects may further slow spending. However the current cycle of property re-valuations can create an attractive opportunity for new and returning buyers to the market. The return of demand for property support prices, and increased household wealth stemming from appreciating asset values, may ultimately flow on to stimulate spending once more.

 

[1] RBA, The Housing Market and the Economy, 2019 <https://www.rba.gov.au/speeches/2019/sp-gov-2019-03-06.html>
[2] ABS, 2018, Residential Property Price Indexes: Eight Capital Cities, ‘Table 7. All Index Numbers’ time series spreadsheet, cat. no. 6416.0 <https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202018?OpenDocument>
[3] CoreLogic, May National Media Release, 2019 <https://www.corelogic.com.au/sites/default/files/2019-05/CoreLogic%20home%20value%20index%20May%20FINAL.pdf>
[4] ABS, Household Accumulation of Wealth, 2019 <https://www.abs.gov.au/ausstats/abs%40.nsf/mediareleasesbyCatalogue/9386C1644C92E007CA258425001481D1?OpenDocument>
[5] Westpac IQ, Australian Retail Sales Q1, 2019 <https://westpaciq.westpac.com.au/Article/38378/51020/>
[6] Federal Chamber of Automotive Industries, FCAI releases April 2019 new vehicle sales figures, 2019 <https://www.fcai.com.au/news/index/index/year/all/month/all/article/566>
[7] BT Financial Health Index, 2019 


This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 7 June 2019.  This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The information provided is general in nature and does not constitute financial product advice.  Before acting on it, you should seek independent advice about its appropriateness to your objectives, financial situation and needs. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. 

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