Australia's property slump casts doubt on household spending

Australia’s falling house prices are raising doubts about the resilience of household spending.

There are signs of weakness emerging, with data Friday showing retail sales growth tumbled sharply in the third quarter. Australians were happy to fund higher spending by putting away less savings as the value of their homes increased. But when prices drop, as they have nationwide for 13 months, building a buffer traditionally becomes the priority over shopping.

For Governor Philip Lowe, uncertainty about consumption has been one of his more regular warnings on the economy. It’s also a key reason why the Reserve Bank of Australia’s board is set to keep the cash rate unchanged at a record-low 1.5 per cent Tuesday for a 25th meeting. Record household debt and stagnant incomes mean there’s little scope to absorb higher borrowing costs.

“There will be a need for more deleveraging,” Joachim Fels, global economic adviser at Pacific Investment Management Co, said in an interview in Hong Kong following a visit Down Under.

“If house prices continue to fall, which looks quite likely, you will probably see consumer spending slowing as well. Whether that is enough to push Australia into a recession is a different question. We are not forecasting a recession in Australia but a slowdown looks quite likely,” said Fels.

Underscoring the price weakness, nationwide auction clearance rates have held below 50 per cent for the past five weeks, compared with as high as 72 per cent at the start of the year. In the weekend just gone, preliminary results came in at 47.4 per cent, according to CoreLogic data released Monday.