Powered by MOMENTUM MEDIA
subscribe to our newsletter
Risks flagged over housing slump’s drag on consumption

Risks flagged over housing slump’s drag on consumption

Macroeconomic risks associated with the link between the fall in property prices and reduced household consumption have been raised by a senior Morningstar analyst.

According to Morningstar’s head of equity research Peter Warnes the continued decline in home values could trigger a retraction in household consumption, which could pose a broader risk to Australia’s economic stability given the contribution of consumer spending to the nation’s GDP.

The latest figures provided by property research firm CoreLogic revealed that national dwelling values have slumped by 4.8 per cent nationwide, driven by a 6.1 per cent drop across Australia’s capital cities, led by a 8.9 per cent fall in Sydney and a 7 per cent decline in Melbourne.

Advertisement
Advertisement

Mr Warnes observed that while the downturn in property prices may not pose a direct threat to stability, its link to household consumption could be a cause for concern.

“It’s not so much housing prices directly and their implication on GDP, it’s more household consumption and its link to GDP,” Mr Warnes said.

“[Household consumption] is the biggest single contributor [to GDP] – 55 to 60 per cent of GDP comes from household consumption and that is individually and collectively bigger than any of the other contributors.”

Mr Warnes continued: “What you’ve had over the last three years is that consumption has held up quite well, but it’s been supported by a fall in the savings ratio. The savings ratio in the last three years, has come from about 10 per cent to now a 10-year low of around 1 or 2 per cent.

“That can’t continue because the piggy bank hasn’t got any more money into it.”

The Morningstar analyst added that the nation’s GDP could take a hit if Australians increasingly opt to save in fear of a continued fall in the value of their household wealth.

“[If that] caution leads to a turn-around in the savings ratio – in other words, the savings ratio starts to go up – that is not good news for consumption because [consumers] would be saving more and consuming less,” Mr Warnes said.

Mr Warnes comments coincide with the release of the latest ANZ-Roy Morgan Australian Consumer Confidence index, which has reported a 2.2 per cent fall in the first week of 2019.

The data also revealed that confidence in current financial conditions fell by 4.3 per cent, the third consecutive fall, while confidence in future financial conditions rose 1.1 per cent.

The research also reported that confidence in both current and future economic conditions dropped, falling by 4.2 per cent and 3.1 per cent, respectively.

Further, according to the data, fewer Australians believe now is the ‘time to buy a household item’ (1.1 per cent drop).

Reflecting on the data, ANZ Research’s head of economics David Plank attributed the decline in consumer confidence to a number of global and domestic market developments, but made specific reference to increased spotlight directed at the fall in property prices.

However, Mr Plank also noted that despite the fall in consumer confidence, levels “remain above average”.

[Related: APRA-engineered housing correction ‘impressive’: Moody’s]

Risks flagged over housing slump’s drag on consumption
Warning sign
mortgagebusiness

Charbel Kadib

Charbel Kadib is a journalist on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel held roles with public relations agency Fifty Acres, and the Department of Communications and the Arts.

Charbel graduated from the University of Notre Dame Australia with a Bachelor of Arts (Politics & Journalism).

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Latest News

Consumers are more pessimistic about the economy following the Reserve Bank’s rate cut in June, according to new survey results. ...

The upper quartile of the housing market has suffered the sharpest declines in dwelling values, but according to CoreLogic, prices in that s...

The mutual bank has announced the introduction of a new investment home loan product. ...

FROM THE WEB
podcast

LATEST PODCAST: A new record-low cash rate

Do you think the banking royal commission recommendations could negatively impact competition in the mortgage market?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.