iscover
iscover 
While the impacts of interest rate hikes are well known to slow consumer spending, the fall in house prices will create another negative for households by reducing overall wealth, according to AMP senior economist Diana Mousina.
In the latest Econosights, Ms Mousina said given 65 per cent of wealth is housing-related, a fall in home prices will contribute towards a “negative wealth effect”.
The latest data from the Australian Bureau of Statistics (ABS) showed the mean price of residential dwellings fell $18,900 to $921,500 over the three months to June, equating to a valuation drop of approximately $6,300 a month or $210 a day.
National home prices peaked in April 2022 and have fallen by nearly 5 per cent to mid-September, with economists estimating they could fall up to 20 per cent by the end of 2023 before ticking up again.
Ms Mousina said home prices are declining due to a combination of, higher mortgage rates, poor affordability (especially in Sydney and Melbourne) as prices “ran up hard over 2020/21” and a lift in supply in Sydney and Melbourne as we come into the spring selling season.
Given the cash rate has reached 2.35 per cent and further hikes are on the horizon, alongside falling house prices, Ms Mousina said consumer spending will begin to slow, adding to a negative wealth effect.
As housing in Australia is the largest single source of wealth for households, there is a close relationship between home prices and wealth.
The “wealth effect” is an economic concept referring to a change in consumer spending following an adjustment to household wealth, when you feel like your assets are worth more you feel confident to spend.
But consumer spending is “holding up for now” due to high household accumulated savings, housing prepayments, a shift in spending from goods to services and lags from interest rate rises to changes in housing debt payments — but this won’t last forever, Ms Mousina said.
“We see consumer spending growth declining to under 1 per cent per annum by late 2023 — well below its long-run average level of around 3 per cent per annum,” she said.
Despite the close correlation between wealth and home prices, changes in home prices do not have an equal impact across households. For example, higher home prices are positive for investors and home owners with no plans to upgrade but are negative for households looking to get into the market or upgrade, Ms Mousina said.
“However, the composition of home ownership in Australia means that the majority of the population benefits from higher home prices, with 2/3 of households (or around 7 million households) either owning a home outright or paying a mortgage,” Ms Mousina said.
Home sales slow
With more homes on the market and the cost of purchasing on the rise, the Housing Institute of Australia reported a fall in property sales for the month of August.
The HIA New Home Sales report, a monthly survey of the largest volume home builders in the five largest states, found a 1.6 per cent drop in sales in August, which followed the 13.1 per cent decline seen in July.
The report said July and August represented the “weakest pair of months” for new home sales since the lockdowns in 2021.
HIA’s economist Tom Devitt said the impact of recent and future rate increases will continue to flow through as an “adverse impact on the sale” of new homes in coming months.
“There remains a significant volume of work under construction and approved-but-not-yet-commenced that will provide a buffer for the industry and ensure building activity and demand for skilled trades remains exceptionally strong through the rest of 2022 and into 2023,” Mr Devitt said.
[Related: Economist expects upswing in house prices by 2024]
ISCOVER 
