It’s being attributed to all manner things – floods, ecommerce, the carbon tax, interest rates, Greece and I’m sure I heard someone blame zombies.
The one thing that has rarely rated a mention is the relationship of house prices to consumer spending, something that can be termed as the wealth effect.
When house prices rise, consumers tend to spend more, basically because they perceive themselves to be wealthier.
Unfortunately, that results in a negative saving rate and consumers using their homes as ATMs by spending their home equity.
To illustrate this point, between 2001 and 2008 when home values were really rising and the economy was booming, the amount of equity being put into homes across Australia was consistently negative.
In other words, when home values were appreciating, homeowners were withdrawing those gains to spend on consumption.
Debt fuelled borrowing, pushing up asset values, making existing households holders feel richer, resulting them spending more, fuelling retail growth and creating jobs has been the norm.
It all sounds fantastic – endless growth – but it couldn’t last, eventually the chickens came home to roost because asset prices hit a ceiling due to the amount of debt required to service them.
Australia reached the dubious honour of having highest household debt to disposable income ratio in the world at 156%, bigger than America, and that’s going to take a lot of paying back.
The wealth effect cuts both ways because as house prices stagnate and fall, so does economic confidence, resulting in falling consumer spending.
And as asset prices fall, the debt accumulated along the way remains, basically as a drag on consumer spending.
The best way to avoid this problem is not to let debt fuelled asset bubbles occur in the first place.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we ‘re one of only six fiduciary financial advisors in Australia.
