Australia's property slump casts doubt on household spending

Sydney

AUSTRALIA'S falling house prices are raising doubts about the resilience of household spending.

There are signs of weakness emerging, with data released last Friday showing that 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 Reserve Bank of Australia (RBA) 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 last Tuesday for a 25th straight month.

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, said in an interview 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 Mr Fels.

Last Friday's data showed retail sales rose just 0.2 per cent last quarter, from 1 per cent in the previous three months, while a report two days earlier showed inflation still subdued.

The RBA releases its quarterly updated forecasts this 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 per cent 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." BLOOMBERG