Risks flagged over housing slump’s drag on consumption

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.

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]