Why Australians have lost $300 Billion this year

Mon, 22 Oct 2018  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/3665708-004156966.html 

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Why Australians have lost $300 Billion this year

The total wealth of Australians has dropped by close to $300 billion since the start of 2018.

How much of that is yours?

The fall in house prices and now the slump in the stock market is undermining the wealth of Australian householders.

This is an important trend given the solid link between the change in wealth and household spending. Numerous studies show that when wealth increases, growth in household spending is faster than it would otherwise be. It appears that householders view their extra wealth in a manner that sees them lower their other savings or use that wealth as collateral for additional borrowing fund extra consumption. They may even ‘cash in’ their extra wealth and use those gains to fund additional spending.

When they observe falling wealth, experience weak wages growth and realise their savings rates are perilously low, they will adjust their spending – down.

Discretionary spending on holidays, meals out, clothes and updates of car and other consumer durable goods will be curtailed.

Before this wealth destruction, household spending was soft. Up to their eyeballs in debt, consumers were starting to moderate their spending and this was a critical reason that bottom line growth in domestic demand was subdued. It was also a reason why the RBA was unable to follow through with its preconceived agenda to lift official interest rates – the economy could not possibly absorb such a move. As the year-end sales period for retailers moves into full swing, the drivers of consumer spending look parlous.

It would be a near miracle if retail spending (per capita) rises in the December quarter which could see bottom line GDP growth slip to 0.5 per cent or less.

With retailers set to embark of widespread discounting to reduce their inventory, inflation will remain extremely low, most likely well below the bottom of the RBA’s 2 to 3 per cent target range.

The implications for the unemployment rate are worrying. Already, the reliable ANZ job advertisement series has topped out, and is pointing to no further progress in reducing the unemployment rate. Further, the business expectations survey pointed to a dip in firms’ expected employment levels through to the end of 2018.

The RBA forecast for unemployment to hit 5 per cent and stay there are looking increasingly shaky.

The $7 trillion question is how much more wealth will be lost as house price falls continue and the stock market ructions continue to impact the ASX.

Whatever the exact amount, it is safe to say that the falls already witnessed are enough to hurt spending for the next few months. It means the RBA will not be hiking interest rates any time soon and indeed, the door is wide open to an interest rate cut early in 2019 if the deteriorate sees unemployment back above 5.5 per cent and inflation entrenched below 2 per cent.

Tough times indeed.

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

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An update on my house price bet with Tony Locantro

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html 

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An update on my house price bet with Tony Locantro

It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.

Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.

The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.

Simple.

That background is important because the ABS just released the official dwelling price data for the March quarter 2019.

In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.