Australian housing market weakening, what it means for the economy

I have posted up a couple of previews of the housing finance data due today in Australia (0030 GMT)

  • For September
  • Home loans m/m, expected is 2.0%, prior was 1.0%
  • Investment lending m/m, prior was 4.3%
  • Owner-occupied loan value m/m, prior was 0.9%

Previews here:

  • Australia housing finance data today (for September) — preview 
  • Australia housing finance data today (for September) — more preview

I have come across this, which is not a preview of today’s data but instead a bigger-picture look … so apropos of the day I’d  though I’d stick it up.
Via Capital Economics: Australia & New
Zealand Economics Weekly: Housing and the
economy

In summary Cap Eco say (bolding mine):

  • The stagnation in house prices in Australia in recent months is a big deal as it means housing won’t support the economy by as much as in recent years.
  • The plunge in the number of home sales will continue to restrain spending on items like fridges and furniture.
  • And the weaker price trend will contribute to a sustained period of unusually soft retail sales.
  • The housing market is unlikely to go into free-fall, but we do expect prices to move sideways over the next year or so before falling by around 10% once the RBA starts to raise interest rates in the second half of 2019. That means the economy can’t rely on housing to provide a helping hand.

And, a bit more from the report:
So what does this mean for the economy?

  • Well when mining investment was collapsing, the RBA did a good job of using lower interest rates to juice up dwellings investment and consumption. But with house prices now stagnating, we don’t think much more can be squeezed out of those areas.

And … this on the ‘wealth effect’

  • The less timely and more indirect influence on consumption from the so-called wealth effect is much harder to identify or quantify.
  • When house prices are rising rapidly homeowners feel wealthier and tend to spend more as they are willing to reducing their saving rate as their house is doing their saving for them. But when prices stagnate, that boost disappears as households turn their attention back to more traditional methods of saving. And should house prices actually fall, then the wealth effect would start to reduce consumption.
  • It is possible that the weaker housing market is playing a part in the recent softness of overall retail sales. After all, with employment growth having been remarkably strong over the past year, it is striking that the volume of retail sales rose by only 0.1% q/q in the third quarter.
  • The stagnation in house prices adds to the other factors, such as low wage growth, rising utility prices and high household debt, that are restraining household spending power.
  • Overall, the weakening in the housing market is an important change and we suspect it will contribute to dwellings investment subtracting from economic growth and consumption growth slowing from 2.6% now to about 2.0% next year.

Good stuff from Cap Eco.
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