Australia’s weakening housing market will shave 0.3 percentage points off economic growth over the next three years as consumers pull back spending as their home values decline, Capital Economics says.
The consultancy, which earlier this year widened its prediction from 10 per cent to a 12 per cent decline from peak to trough in national dwelling values by 2020 – equating to an $800 billion loss in housing wealth – expects this to slow consumption spending by about 1.5 percentage points over the same period.
“If house prices rise, household consumption tends to grow at a faster rate than their incomes. Households run down their savings rate and let house prices do the savings,” said Capital Economics’ senior ANZ economist Marcel Thieliant.
“By the same token, if house prices fall, then households have an incentive to increase their savings rate to offset the decline in house prices.”
The downbeat forecast, which expects GDP to slow from 3.2 per cent this year to 2.5 per cent by 2020, takes a more bearish view than fund manager AMP Capital, which earlier this month widened its prediction to a national decline of nearly 10 per cent from the 5 per cent decline it previously expected, and if proven true would mark the deepest and most sustained fall in Australian housing prices since at least the 1970s.
But it shows the risks to the wider economy in a falling housing market when housing accounts for about half of household assets.
“If house prices fell, that is mechanically a fall in household wealth,” Mr Thieliant said. “The key question is how does this translate into household spending decisions? We are forecasting households will not increase consumption more or less in line with incomes, which isn’t a very aggressive assumption.”
Other parts of the economy remain strong, Moody’s Investor Service pointed out on Monday. Even as it predicted a “moderate increase” in mortgage delinquencies in NSW and Victoria over the next year, factors such as low interest rates and steady unemployment would limit a deterioration in the housing economy and the number of people who become unable to meet their housing repayment obligations, the ratings agency said.
Even Capital Economics points out that household spending has remained resilient so far, with that measure growing at 3.2 per cent year on year in the June quarter.
Other anecdotal evidence points to resilient spending also. Results published on Tuesday of a consumer survey conducted for online travel insurer InsureandGo, showed that if interest rates rose 50 basis points – or half a percentage point – nearly half of mortgage-holders surveyed (47 per cent) said they would holiday as normal, 37 per cent would downgrade their holiday plans and just 16 per cent said they would cancel their plans.
But spending volumes would not last and the final outcome could be even worse than Capital Economics currently predicts, Mr Thieliant said.
“It’s quite possible households will respond by spending at a slower rate than their income is growing, which would be even weaker than we are assuming,” he said.