A slump in consumer spending is a more immediate threat to the Australian economy than a property crash, experts say.
An ABC Four Corners report on Monday night detailed widespread fears of a property crash, noting that “for every $1 earned, on average, Australians have nearly $2 of debt”.
Household debt hit a record high of 190 per cent of yearly disposable income in the March quarter, according to the Reserve Bank.
ABC journalist Sarah Ferguson, in introducing the program, said it would explore “what happens if Australia’s debt-fuelled housing boom comes to a crashing end”.
Two of the interviewees were Roy Palleson and Rowena Ebona, a Sydney couple on a combined income of $135,000, who said they owed $1.2 million on five investment properties worth $1.5 million.
The implication was that falling prices would leave Roy and Rowena, and thousands of other investors, holding more in mortgage debt than they owned in property, with little income to act as a buffer.
However, Richard Holden, an economist at the University of New South Wales, said a drop in consumer spending was a more immediate concern than a property price fall.
“If you have more of a drop on consumer spending, you’re going to see a contraction on the business side. It flows straight into business investment and business expansion, and that has a multiplier effect,” he told The New Daily.
“They’re not going to be in the mood to give big pay rises or wage rises at all. They’re not going to be employing people and so that then compounds on the consumer side.
“It just goes round in a vicious circle.”
In the latest GDP figures from the March quarter, the share of economic growth flowing to wage earners fell to 51.5 per cent, the lowest since 1964.
Any drop in consumer spending from cash-poor workers could have huge consequences for economic growth, as household consumption currently accounts for about 57 per cent of GDP – and the economy only grew by 0.4 per cent in the March quarter.
Worryingly, the widely-cited consumer confidence index compiled by Roy Morgan has fallen for the past three weeks. The latest ‘confidence’ rating fell to 109.2 points on August 20, down from 118.4 on July 30.
Another concern is that, according to Dr Holden, there are far more factors – such as state and federal stimulus – propping up house prices than there are aimed at boosting consumer spending and wage growth.
“It’s been well discussed what is propping up the property side, with negative gearing and things like that,” he said.
“On the consumer side, when you’ve got high personal income tax rates and not much talk of cuts to those, that’s not going to help consumer spending. And then of course wage growth has been really low and stagnant.”
We learned last week that wages grew in 2016-17 by just 1.9 per cent, the lowest of any financial year since at least 1997, and exactly the same speed as inflation. This meant wages are failing to outpace the cost of living.
Worse still, wages in the private sector grew just 1.8 per cent over the fiscal year, meaning the majority of the workforce actually copped a wage cut in real terms.
An example of the resilience of property prices is that a much-hyped slowdown in price growth earlier this year, precipitated by regulatory intervention from several federal agencies, appears not to have eradicated price growth entirely.
Brendan Coates, a fellow at the Grattan Institute, agreed that the bigger risk “at the moment” from the property market was a drop in household consumption.
“If households found themselves in difficulty with servicing their debts, the more likely scenario would be that they curb their spending in order to meet their obligations, to keep repaying those debts,” he told The New Daily.
Mr Coates cited recent Reserve Bank research that found that the spending of households on variable-rate mortgages was very sensitive to changes in interest rates.
The effects would likely reverberate through the economy, especially the labour market, he said.
“If you have households reducing their spending, that slows income growth through the economy, which presents risks for unemployment,” he said.
“If households are not confident in where things are going, they won’t spend as much and that will have flow-on impacts to other sectors and other industries.”
An example of how this might hurt the economy is the recent warning from G8 Education, the Gold Coast-based childcare centre operator, that sluggish wages growth had contributed to a drop in demand for childcare, cutting into its revenue.
Even without such a consumer-led crisis, Mr Coates said record-low wage growth and low inflation meant mortgage debt would “loom larger for much longer”, instead of being eroded away.
“It’s not just how much you borrow at the time when you take out the mortgage that really matters. It’s how quickly that mortgage gets deflated away by wages growth and inflation,” he said.
“In the past that occurred pretty quickly because we had strong wages growth and relatively robust inflation, and so the debt shrank relative to people’s incomes fairly quickly.
“That’s much less likely to happen now.”