The cautious consumer is an old friend by Leith van Onselen

RP Data’s latest Property Pulse report contained an interesting article entitled Will consumers start spending in 2012?, which contains some fascinating charts and analysis on Australia’s changed spending habits.

In May last year, I wrote an article, The Housing-Retail Link, which discussed the strong correlation between rising (falling) house prices and (increasing) decreasing retail spending, and argued that consumption expenditure, credit growth and job creation will remain subdued as long as Australian housing values remain stagnant or fall.

Now RP Data has provided a similar perspective, although their cause-and-effect appears to be the other way around:

2011 was generally a weak year for the residential property market and retail sector (not to mention manufacturing and tourism as well). Across the combined capital cities home values fell by -3.5% over the 12 months to November 2011. Similarly, the retail sector endured tough market conditions with the total value of retail trade increasing by just 3.1% over the same period…

Over the past decade, retail trade has increased at an average annual rate of 5.1% and home values have risen at 6.1%pa indicating that both measures achieved a performance which was well below average over the past year.

Interestingly, retail trade and housing values are highly correlated, over the past five years the two measures have shown a 93% correlation with one another. The result is to be expected given when you have the confidence to spend on retail items you are more likely to show a preparedness to purchase big ticket items such as homes.

RP Data also includes some great information on Australian’s reduced propensity to use credit cards, with outstanding balances and credit card limits growing at rates far below the 10-year average:

Our desire to use the banks money for day-to-day purchases has also slowed over the past year. The number of credit card transactions grew by just 2.1% over the year to November 2011 compared to average annual growth over the last 20 years of 8.0%. Over the last year, the average outstanding credit card balance grew by just 1.4% and the average credit limit grew by 1.0%. Clearly we are still spending more on credit cards and are increasing our limits however, the annual growth figures for both measures were well below the 10 year average annual growth levels of 6.5%pa and 5.6%pa respectively. In fact, the growth in the average credit limit was the lowest on record, based on records dating back to 1995.

The cautious consumer is obviously more wary of debt and showing a greater propensity to spend their own money rather than the banks. This is highlighted by the fact that the total number of debit card transactions rose by 12.4% over the year. While this is well below the decade average annual growth of 15.2% it significantly eclipses the growth in spending on credit cards.

RP Data then provides some interesting factoids about Australian’s increased risk aversion, with lower risk investment options (i.e. fixed interest and paying down debt) gaining popularity over risk assets (shares and property):

Each quarter when they conduct their monthly Consumer Confidence Survey, Westpac and the Melbourne Institute ask respondents about their views on the wisest place for savings. The December results showed that a financial institution was the most popular (combination of banks, building societies and credit unions) with 34.9% of respondents believing that was the best place. Paying down debt was also popular with respondents at an almost record high of 26.6%. On the other hand, relatively few respondents believed that real estate (14.0%) or shares (6.6%) were a particularly good place for their savings. The results once again highlight the cautious nature of the consumer and their propensity to save or at the very least pay down their debt.

Consumer sentiment has also been at fairly low levels over 2012 with survey respondents largely worried about their family finances over the last 12 months and their prospects for the next 12 months. Respondents have also been concerned about the economic conditions over the next 12 months and five years.

Finally, RP Data concludes with a subdued outlook for 2012 and the prospect that the cautious consumer meme will persist for the foreseeable future:

Even with the prospect of further interest rate cuts in 2012 it may not be enough to encourage households to start spending again. Following the financial crisis in 2008 many Australian’s have become much more aware of the financial and economic environment. The current spate of bad news emanating from Europe is expected to encourage Australian’s to curtail their spending patterns for longer. Also, the growth in jobs has been slowing for a number of months now so many will be aware that this could lead to an increase in unemployment. Given these conditions it is difficult to see how there is going to be a significant recovery in the retail or housing sector in 2012. RP Data expects housing market conditions to improve on last year on the back of lower interest rates however, significant value growth returning to the market over the year would appear to be fairly unlikely.

After reading RP Data’s analysis, I couldn’t help but be drawn to the below spectacular chart from Bill Mitchell showing that the running-down of Australia’s savings ratio over the past decade or so was really an aberration and this ratio appears to merely be returning to its long-run trend:

The ‘cautious consumer’ is really just a return to normal.

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