There is a range of academic literature on this correlation between house prices and the health of consumer spending. The Reserve Bank of Australia a few years ago showed how high house prices were correlated to higher consumer spending https://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-04.pdf .
Academics from North Western University and the University of Chicago found that there was a ‘large’ consumption response, both up and down, to changes in house prices. https://www.restud.com/wp-content/uploads/2017/09/MS20860manuscript.pdf
The authors of this global study warned, quite simply, that there was a ‘widespread policy concern that boom-bust cycles can end with large contractions in consumer spending’.
Which provides food for thought as the house price falls spread around Australia.
In Darwin, housing prices have dropped a stunning 22 per cent since the 2014 peak. In Perth, the fall has been a still painful 11 per cent over the same time period. The collapse in mining investment and a slowing in population growth have impacted these two cities, notwithstanding record low interest rates.
Since September last year, house prices in Sydney have dropped a significant 4 per cent which has reduced the value of a $1.1 million property by $44,000. Little wonder retail sales in New South Wales are stalling and the labour market is showing signs of a turn.
Melbourne house prices are, so far, only down 0.5 per cent from their peak in December but there are warning signs that there will be further weakness as new supply comes on to the market and as the banks have tightened their lending. While the economy continues to muddle along with GDP growth of a modest 2.4 per cent in 2017, a house price decline could be the factor that trips up the economy.
If the fall in home-owner’s wealth across most cities continues or worse gains pace, then you, the consumer, will react by cutting spending, firms will hunker down with lower investing and hiring and the economy will weaken.
But even a modest decline in prices will see consumers trim spending which in turn will see the economy under-perform for yet another year.