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Households are gloomy, but not fragile
Key insights:
- Australia’s housing downturn will slow consumer spending but will not trigger a consumer recession.
- Big-ticket purchases are most exposed, but discretionary spending is not weakening across the board.
- Most households have sufficient income, savings and equity buffers to absorb the downturn.
- Continued growth in jobs and incomes remains critical to households’ ability to weather the downturn.
The downturn in Australia’s housing market is showing little sign of easing. House prices have continued to fall following the RBA’s fourth rate hike in September, with the high-frequency data suggesting the decline is gathering pace. Company updates this week reinforce that picture, with Stockland and Mirvac reporting increasingly sharp declines in buyer demand. Consumer confidence has weakened alongside the property market, adding to the gloomy picture of the household sector. But the outlook for consumer spending is more resilient than either housing or confidence would suggest.
Falling house prices will weigh on spending
Falling house prices are nevertheless a genuine headwind for consumers. Housing makes up around two-thirds of household wealth, and when that wealth falls, households tend to spend less. Our modelling suggests a 10% fall in house prices would reduce household spending by around 1.4% over a 12-month period.
The impact is also likely to be unevenly distributed across spending categories. RBA research finds that discretionary purchases such as cars, household furnishings and recreation respond more strongly to changes in housing wealth than essential spending. That weakness is starting to show up in housing-related purchases, with furniture retailer Nick Scali reporting weaker store traffic and furniture orders. With housing turnover falling even more sharply than house prices, big-ticket and housing-related purchases are likely to bear a disproportionate share of the housing downturn.
But not all discretionary spending is weakening. Car sales have been supported by electric vehicle demand driven by higher fuel prices. ABS data suggest recreation is also holding up, while spending on entertainment in QIC’s shopping centres has remained resilient. This suggests households are adjusting what they spend their money on rather than simply cutting discretionary spending altogether.
Household finances provide a buffer
Households have financial buffers to support spending in the face of the housing downturn. RBA estimates suggest that mortgage stress remains low. Only around 2% of variable-rate mortgage borrowers currently have insufficient income to cover their mortgage repayments and essential expenses. This is below the peak in mortgage stress experienced in the last downturn in 2023-24, reflecting the income growth households have experienced since then, even though interest rates are currently higher. Even among the small share of mortgage borrowers currently experiencing a cash-flow shortfall, the RBA estimates most have enough savings to cover it for at least six months.
Household balance sheets also remain strong, with fewer than 1% of borrowers owing more on their mortgage than their home is worth. The RBA estimates that even a further 20% fall in house prices would leave only around 5% in negative equity. Falling house prices may be making households feel poorer, but for most, they are not creating unmanageable financial distress.
The labour market is critical for incomes
The labour market is also important in supporting household incomes and spending. Last week’s brief examined the upward drift in the unemployment rate, concluding the labour market is loosening rather than unravelling. Jobs are still being created, in aggregate, and wage growth remains robust. The rise in the unemployment rate increasingly reflects slower hiring, with new entrants finding it harder to secure work, rather than widespread job losses. That distinction is important for household spending: the bigger risk would be an outright loss of jobs and household income. Recent improvements in job advertisements provide some reassurance that employment should continue to grow.
In summary, we expect the housing downturn to slow consumer spending but not push it into recessionary territory. Provided jobs and incomes continue to grow, most households have sufficient financial buffers to weather the downturn.