Australia’s business leaders have finally admitted they are concerned about Australia’s crashing property market and falling consumer demand. From The Canberra Times:
Woolworths chief executive Brad Banducci… said cautious consumers at the shopping giant’s stores were buying less each time they shopped…
Mark Steinert, chief executive at housing and retail property giant Stockland, said the company was trying to reshape its shopping centres to deal with the retail slump… “Negative house price growth in Sydney and Melbourne affects the consumer, that’s one of the things hitting consumer sentiment right now…
Crown Resorts executive chairman John Alexander said the casino giant had noticed parallels between international and local customers.
Get used to it fellas. With house prices crashing, wage growth remaining anaemic, and consumers carrying mountains of debt, consumption necessarily has to fall.
The below analysis by Gerard Minack says it best. According to Minack, there is historically an inverse relationship between house prices and the household savings rate, meaning as Australian house prices fall, the savings rate will necessarily rise, draining on consumption:
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The evidence from other economies is that household saving rates typically keep falling for around a year after house prices peak relative to income. The adverse wealth effect – when household saving starts to rise – normally hits a year or two later.
Exhibit 7 shows the change in household saving rates around the house price/income peak for Australia and a selection of economies that saw significant house price declines in the GFC. On average, the household saving rate increased by 3½ percentage points over an 8 quarter period, starting one year after the peak in house prices.
Australia is toast if it follows that pattern. Exhibit 8 shows what would happen to real consumer spending if the household saving rate rises by 3½ percentage points over the next two years. I have assumed that real household disposable income continues to rise by 1½%. Of course, that would be too optimistic: income growth would weaken if consumer spending – which accounts for over 55% of GDP – started to weaken as this scenario implies.
This illustrates the point that the wealth effect alone is capable of causing recession. The uncertainty is whether the wealth effect kicks in as powerfully as in this simple example. If the recent pattern of macro weakness – in house prices, building approvals and hiring intentions – continues, then I will make the bet that the wealth effect will cause a recession in Australia, most likely later this year.
Given household consumption makes up more than half of Australia’s growth, dwelling construction is also falling, and infrastructure investment is about to peak:
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Australia is facing not just slowing consumer spending, but the strongest possibility of recession for more than two decades.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
