Australia has lost $145 billion in housing wealth.
Australia has lost $145 billion in housing wealth.

Worrying sign: Australia’s lost $145b

AUSSIE house prices just keep falling. Property experts CoreLogic now say Sydney's price decline is bigger than the fall in the 1989-91 at over 10 per cent.

Melbourne is not far behind, while Perth is miles ahead, having got started with its price falls years ago. South Australia, Tasmania and the ACT are faring much better, but even they are not immune to the negative effects on the national economy.

The big fear coming into Christmas is the "wealth effect". If your assets are worth less, you spend less.

The wealth effect worked brilliantly for the Australian consumer economy on the way up. As our house prices grew, we spent more. In one famous Reserve Bank research paper from 2015, they figured out we bought more cars when house prices went up.

So how are car sales now? Bad. Australians bought fewer new cars in November than October, by 7.4 per cent. That's a big fall. Overall in 2018 we've bought 20,000 fewer new cars than 2017 (a 1.9 per cent fall). There are hints we're moving to cheaper cars too. Mercedes Porsche and Audi sales are down sharply but Kia and Mitsubishi are still growing.

HOW BIG IS THE WEALTH EFFECT?

Since last year, Australia has lost $145 billion in housing wealth, according to the most recent Australian Bureau of Statistics preliminary numbers on the value of the total dwelling stock.

Hundreds of billions of dollars. Sounds like a lot? The word billion is one we humans are not terribly good at grasping. Sometimes it's better to understand it in per person terms.

I divided housing value by population to calculate how much the loss is per person. So here it is. The fall in wealth since the December quarter last year is equal to $8900 per person nationwide. That's $8900 for every adult and child.

Would you spend less over Christmas if your assets were suddenly worth less by $8900 for every person in your household?

Of course, the fall in wealth is not evenly spread out. This next chart shows how much housing wealth has changed per person, state-by-state.

 

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NSW Christmases and Tasmanian Christmases might have very different levels of cheer.

SHARES TOO

The wealth effect is not helped by the fall in share markets in recent weeks. Australia's $1.5 trillion share market is down by over 10 per cent since August. That's another $150 billion or so.

I checked my super balance the other day and now have about 10 per cent less money saved up for retirement than I did a few months before. Which felt completely dispiriting. The good news for me is I'm not about to retire. But for people drawing down their super, a 10 per cent share market fall can make a real difference to their weekly income.

THE REAL ECONOMY

The wealth effect is likely to hit our real economy via lower spending. How bad it will be we won't know for a while. Christmas spending could somehow hold up. We will find out officially early next year, but if shopping centre carparks are empty and retailers start discounting before Christmas that could be a bad sign.

Of course, if the economy gets bad enough, the government will step in and try to boost it with spending and interest rate cuts. But the government could face a multi-prong problem from falling house prices.

The second way Australia's economy could get burned is if construction jobs dry up. Plenty of projects are due to finish in 2019. Property developers probably don't want to start so many new projects with house prices still falling. That could leave a lot of Hiluxes parked in the driveway at home as tradies look for work.

One tight Christmas would be bad enough. But if the hit to the real economy stretches out for all of next year Australia could be in for some of the hardest times it has experienced in years.

Jason Murphy is an economist. He writes the blog Thomas the Think Engine. Continue the conversation on Twitter @jasemurphy


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