The Wealth Effect
  • Low listing activity has made buyers compete more for existing stock, which has driven up home prices.
  • At the same time, new mortgage rates are more competitive as those seek to refinance to better deals.
  • RBA modelling suggests there is a causation of increased home prices and wealth leading to increased spending, called the wealth effect.
  • Retail trade turnover is up, as is debit/credit card activity, particularly on small-time discretionary goods and vehicle expenses.
  • April's pause in the cash rate caused the Westpac consumer confidence index to spike, and the same could be experienced in July. 
  • This dulls the effect of RBA rate rises, designed to curb spending to temper inflation.
  • However this could turn around, leading to a 'double dip' housing market fall, with listings picking up and asking prices declining again.

The primary goal of increasing the cash rate is to lower inflation, and lowering household consumption can lead to lower inflation rates. 

Low listing supply, more mortgage competition, and a home price rebound are thought to have kept consumer spending at elevated levels. 

This is because of the 'wealth effect', where RBA modelling suggests a 1% rise in household wealth leads to a 0.1% rise in household consumption. 

AMP Capital chief economist Dr Shane Oliver told InfoChoice this was the biggest uncertainty for the RBA.

"On the one hand many household have strong saving buffers, property prices are still high albeit still down from their 2022 levels and those with bank deposits are seeing higher interest rates," Dr Oliver said.

"But against this but many more recent borrowers have very low or no buffers and are seeing a significant and painful squeeze on their budgets.

"The RBA estimated that 15% of those on variable rates will go cash flow negative this year at a 3.75% cash rate and we are now above that.

"I suspect ultimately the stretched households who tend to be in the 25-45 year old demographic will have a bigger impact on the outlook for the economy than those who are in a better position and that this will lead to lower growth."

Wealth and consumption up

ABS data indicates for the March quarter, household wealth increased 2.1% or $299.1 billion to more than $14.8 trillion Australia-wide.

Net worth per capita increased 1.6% to $561,750.

ABS' head of finance statistics Mish Tan said this was partly due to more Aussies parking money in deposits thanks to higher interest rates.

“Households saw significant investment in high interest savings deposit accounts for the first time since the beginning of the Reserve Bank of Australia’s increases to the cash rate target, as banks offered interest rates comparable to those on term deposits,” Dr Tan said.

APRA data also revealed Aussies collectively had more than $246 billion parked in offset accounts as of the March quarter - a new record high, and more than $2 billion more than the previous quarter. 

This comes as the ABS revealed retail turnover in May rose 0.7% month on month, and 4.2% compared to May 2022. 

In seasonally adjusted terms, retail turnover was more than $35.5 billion in May, the second highest month on record apart from November 2022 which recorded $35.8 billion. 

However retail turnover is not inflation-adjusted, and Dr Oliver said retail is falling in real terms.

The more acute Westpac card tracker index shows an 11.4 point lift in the last two weeks of June, which Westpac economists attributed to end-of-financial-year sales; spending on vehicle expenses was also a major driver.

This roughly coincides with ABS lending data showing a 9.3% lift in personal loans for vehicles in May, and car sales data posting the strongest June month since 2018 with more than 120,000 deliveries.

Turnaround in residential lending and home prices

A peculiar turnaround in first home buyer activity also took shape in May, with 9,651 first home buyers entering the market according to ABS figures.

This is the highest level in original terms since August 2022, and 37.4% higher than the lows of February 2023.

The average loan size for first home buyers also increased 3.53% from February to reach $499,000 in May.

This has coincided with low listing activity, well below five-year averages, which is pushing up home prices with CoreLogic recording a 3.4% rebound since the trough in May - the median dwelling value was at $723,006 in June.

ABS data showed the total value of dwellings rose a further $140 billion in the March quarter to a tick under $9.9 trillion for a mean price of $896,000.

A degree of fear-of-missing-out or FOMO is creeping back into the market according to Dr Oliver.

"Immigration has surged and is likely to exceed a record 400,000 this year driving the fastest population growth in 15 years at the same time that the supply of new dwellings is slowing with falling building approvals," he wrote in a bulletin on Monday.

CoreLogic research director Tim Lawless said this is why June 2023 might not be the last cash rate hike.

"While the RBA has been clear it doesn’t target asset prices, there is a risk that higher housing prices could keep inflation higher for longer as homeowners feel wealthier and more willing to spend," Mr Lawless said.

A turnaround from the turnaround?

"Despite rates holding firm in July, we could see some a further dampening of the recent exuberance seen across housing markets, where values have generally been rising since March," Mr Lawless said.

Recent SQM Research data showed there could be a slight tempering of demand and ergo dwelling prices in the future as listings were up, and asking prices were down in June.

The number of listings rose 1.8% in June to just over 230,000 properties, aided largely by more listings in Sydney, Brisbane and Adelaide. 

Compared to June 2022 there was an overall 3.9% increase in listings, however listings were down considerably in Sydney (-8.1%); Melbourne (-6.2%); and Hobart (-14.6%). 

New listings (sub-30 days) rose 1.6% in June, while older listings (180 days-plus) rose 2.4%, and up over 30% in the past 12 months. 

That said, distressed listing activity fell a further 4.3% month on month.

Asking prices fell in June by 2%, with SQM attributing this to weaker regional markets. 

The combined (house and unit) average asking price nationwide was just over $765,000, down 2.0% on the month but up 3.1% over the year.

However SQM managing director Louis Christopher said the buoyancy might not be sustainable.

“Our overall view remains the market is at significant risk of a double dip downturn in our capital cities for the second half of 2023 given the additional tightening in monetary policy over the months of May and June," Mr Christopher said.

Westpac senior economist Matthew Hassan also said the current home price rebound might not be sustainable. 

"The June update [of CoreLogic home values] continues the theme of steady price gains that are sustaining despite further interest rate rises and very weak turnover," Mr Hassan said.

"This is a discomfiting mix. Price momentum may quickly fade if we see a rate hike hit to expectations and/or a material lift in ‘on-market’ supply."

On home lending, Mr Hassan said the recovery "looks susceptible to stalling". 

Confidence is key

Australia's leading indicator of consumer sentiment, the Westpac-Melbourne Institute consumer confidence index, rose 9.3% in April which was attributed to the cash rate pause that month.

The overall index that month was a pessimistic 85.8, but 'house price expectations' was 130.31 - not far below its level in April 2022.

In May the overall index fell to 79.0, and was 79.2 in June - some of the worst results since the early 1990s recession.

"The survey was taken over the period 5-9 June. That period covered the announcement of the decision by the Reserve Bank to lift the cash rate by 0.25% from 3.85% to 4.1%," Westpac chief economist Bill Evans said.

"While the full survey showed little net change in sentiment, responses within the survey week show a big rate rise impact.

"Prior to the announcement of the rate hike decision confidence had lifted sharply from 79.0 in May to 89.0. But following the announcement it tumbled to an extremely low 72.6."

PropTrack director of economic research Cameron Kusher expects to see similar in July off the back of the latest pause.

"When we get to the point that interest rates are stable for a number of months, then that confidence will start to come back," Mr Kusher told the Savings Tip Jar podcast.

"Even if the Reserve Bank pauses interest rates for one month, there's this big rebound in consumer confidence when that occurs. So imagine that extended for three or four months."

Mr Kusher also said increased selling confidence could ironically lead to lower home prices.

"If there was to be more stock that came onto the market, through spring for example, people that are buying would have more negotiating power and might actually be able to negotiate a better price by playing properties off one another," he said.