Given that consumer sending makes up over 50 per cent of the economy, a marked pull-back in spending growth as the falls in house prices undermine wealth, raise the risk of significant weakness in the overall economy later this year and into 2019. As seen with the data on building approvals, a house price slump will also see new construction levels fall, which will further undermine bottom line GDP growth.
It was been almost 27 years since the last recession in Australia. For now, a recession in the near term remains unlikely despite these negative influences which are only just starting to play out in the broader economy. For the moment, the economy is being supported by solid levels of public sector infrastructure spending and non-mining business investment. Export volumes are also respectable, all of which will add to the economy and make a recession unlikely.
But with the global economy clearly taking a step lower since the start of 2018, some of the positive influence on Australia from global markets could start to fade.
Domestic policy uncertainty as the Federal election campaign hots up could also be a negative for private sector spending and the economy. The major parties will be arguing over tax policy, inequality, health and education, as well as who is best at managing the economy. It is possible that an ugly election campaign will erode confidence, and with it spending into an already fragile economic environment.
As a result of all of these hard facts and risks, economic policy should be eased. This is not, as some have claimed, aimed at reflating house prices and wealth, but because the forces at work in housing suggest broader price weakness, regardless of the level of interest rates.
Indeed, a case can be made for maintain a prudent approach to house lending to work against such a price rebound.
Rather, policy has to be eased to ensure private sector business investment picks up more momentum, to help deliver a lower level for the Australian dollar which will boost exports and to enhance the cash flow of those with a mortgage but with no seriously vulnerability to the weakness in house prices.
If policy is not eased, the risk of a recession will build as house prices keep falling.