Anaemic consumer spending bigger threat than property crash: Experts

While a property market crash and its impact on the Australian economy is a topic of hot debate, some experts say a slump in consumer spending is a more immediate threat to the economy.

The view comes in the wake of the latest ABC Four Corners show which noted that “for every $1 earned, on average, Australians have nearly $2 of debt” and it stems from a national obsession with buy property.

Household debt hit a record high of 190 per cent of yearly disposable income in the March quarter, according to the Reserve Bank.

Show presenter Sarah Ferguson said the programme would explore “what happens if Australia’s debt-fuelled housing boom comes to a crashing end”.

Two of the interviewees, Roy Palleson and Rowena Ebona, a Sydney couple on a combined income of $135,000, said they owed $1.2 million on five investment properties worth $1.5 million.

A fall in property prices would leave Roy and Rowena, and thousands of other investors, holding more in mortgage debt than they owned in property, with little or no buffer.

However, University of New South Wales economist Richard Holden said a drop in consumer spending was a more immediate concern.

“If you have more of a drop on consumer spending, you’re going to see a contraction on the business side. It flows straight into business investment and business expansion, and that has a multiplier effect,” he told The New Daily.

“They’re not going to be in the mood to give big pay rises or wage rises at all. They’re not going to be employing people and so that then compounds on the consumer side. It just goes round in a vicious circle.”

The latest GDP figures from the March quarter reveals that the share of economic growth flowing to wage earners fell to 51.5 per cent, the lowest since 1964.

Household consumption currently accounts for about 57 per cent of GDP and any drop in consumer spending from cash-poor workers would hit growth.

The economy only grew by 0.4 per cent in the March quarter.

The widely-cited consumer confidence index compiled by Roy Morgan has fallen for the past three weeks. The latest ‘confidence’ rating fell to 109.2 points on August 20, down from 118.4 on July 30.

Dr Holden also says that there are far more factors – such as state and federal stimulus – propping up house prices than those aimed at boosting consumer spending and wage growth.

“It’s been well discussed what is propping up the property side, with negative gearing and things like that,” he said.

“On the consumer side, when you’ve got high personal income tax rates and not much talk of cuts to those, that’s not going to help consumer spending. And then of course wage growth has been really low and stagnant.”

“We learned last week that wages grew in 2016-17 by just 1.9 per cent, the lowest of any financial year since at least 1997, and exactly the same speed as inflation. This meant wages are failing to outpace the cost of living.”

Wages in the private sector grew just 1.8 per cent over the fiscal year, meaning the majority of the workforce actually copped a wage cut in real terms, he said.

Meanwhile, property prices continue to be resilient in spite of regulatory measures.

Brendan Coates, a fellow at the Grattan Institute, said the bigger risk “at the moment” from the property market was a drop in household consumption.

“If households found themselves in difficulty with servicing their debts, the more likely scenario would be that they curb their spending in order to meet their obligations, to keep repaying those debts,” he was cited as saying by The New Daily.

He pointed to RBA research that found that the spending of households on variable-rate mortgages was very sensitive to changes in interest rates.

The effects would likely reverberate through the economy, especially the labour market, he said.

“If you have households reducing their spending, that slows income growth through the economy, which presents risks for unemployment,” he said.

“If households are not confident in where things are going, they won’t spend as much and that will have flow-on impacts to other sectors and other industries.”

An example of how this might hurt the economy is the recent warning from G8 Education, the Gold Coast-based childcare centre operator, that sluggish wages growth had contributed to a drop in demand for childcare, cutting into its revenue.

Even without such a consumer-led crisis, Coates said record-low wage growth and low inflation meant mortgage debt would “loom larger for much longer”, instead of being eroded away.