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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The RBA is betting that the current slump in house prices and dwelling approvals are orderly and will not have any material or lasting consequences for the economy. In fact, RBA Governor Philip Lowe believes the fall in Australian house prices “is good news”, “manageable” and “a welcome development”. Further, in its November Statement on Monetary Policy, the RBA suggested that house prices “have continued to ease gradually”, which is a remarkably bland assessment given that close to $400bn has been wiped off the value of Australian houses since the price peak in September 2017.

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How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents

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It is an important debate on a policy change that will have implications for the housing market, particularly for first home buyer and investor demand.

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It is a frightening scenario for property obsessed Australians with the value of all dwellings in Australia estimated to be around $7 trillion.

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