Falling house prices dent big spenders

From David Uren today:

A research study by Commonwealth chief economist Michael Blythe, which draws on surveys of the bank’s customers, backs the Reserve Bank’s view that elevated housing debt is not an imminent threat to financial stability, with the largest debts held by those best able to afford them. But Blythe shows the build-up of debt is having a significant effect on consumer behaviour, which has responded to the growth in housing wealth very differently from the housing boom in the first half of the 2000s.

…The boom has greatly increased household wealth — ABS estimates show the value of the housing stock has risen by $2 trillion over the past 4½ years. Blythe says that traditionally, households spend about 4c out of every dollar of additional wealth, however this has not occurred during the boom. Instead, households have been making net equity injections into their housing, while consumer lending indicators show no appetite to tap into accumulated wealth.

“There has been a change in consumer behaviour. They were less responsive to wealth on the way up, and the risk is that they react more on the way down, wanting to maintain the buffers they’ve built up,” says Blythe.

The Commonwealth has analysed use of credit cards by its home loan holders.

Although spending growth has slowed for everyone, it has slowed more for those with home loans, and the biggest spending slowdowns are evident among those with the largest loans.

People with loans greater than $750,000 have cut back their spending by at least 3.3 per cent compared with a fall of less than 1.7 per cent for those with loans smaller than $250,000.

Jumbo mortgage held by those who can afford them…as shown by Gerard Minack way back in his 2010 housing report, Australia’s household debt profile was very similar to the USA’s just prior to its housing bust:


Of course it will have changed now given the US unwind but I doubt very much that the composition has changed here. Anyway, the point is that “the rich hold all of the debt” is, by analogy, meaningless…

It’s always the same in these adjustments. Asset prices break first. Consumption falls. Unemployment rises. Rinse and repeat.

David Llewellyn-Smith
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