(Bloomberg) -- 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 percent 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.
Data Friday showed retail sales rose just 0.2 percent last quarter, from 1 percent in the previous three months, while a report two days earlier showed inflation still subdued.
The RBA releases its quarterly updated forecasts Friday. One risk to the outlook cited in the previous Statement on Monetary Policy was spending, with the central bank noting that housing accounts for about 55 percent of total household assets.
“Lower housing prices could lead to lower consumption growth than is currently forecast,” it said in August. “Although the earlier gains in national housing wealth may not have encouraged much additional consumption, it is possible that the consumption decisions of highly indebted and/or credit-constrained households could be more sensitive to declines in housing prices.”
