Hidden danger in house prices
AUSTRALIAN retailers should be nervous about our falling house prices, with an expert warning they've got six months before a huge drop in sales.
That's because people who buy or build homes tend to head to the shops next to buy things to fill their new house.
But not only are house prices in our major cities falling, approvals have fallen off a cliff. So while for the next few months there'll be people moving into shiny new homes, by 2019, that will slow down.
AMP Senior Economist Shane Oliver told our sister paper news.com.au that Australia can look to Canada to see where we're heading.
Research from last year showed as Canada's housing market turned so did purchases of household goods as people stopped feeling flush from rising prices and buying new fridges, washing machines, and TVs.
This was bad news for Canada's big box retailers.
"When we get to the peak of new dwellings come into the market and as new house prices falI I would expect household goods go negative as it has in Canada," Mr Oliver said.
"The complication is that you've got building approvals which lead the construction cycle for a long way."
But approvals have peaked and are now heading south.
WHY HAVE WE BEEN SPENDING SO MUCH UNTIL NOW?
As house prices grow, so do people's spending - even if their wages aren't growing at the same rate. This is sometime referred to as the wealth effect, but the opposite is also true. As house prices fall, people tighten their belts and that can prove ugly if your business is selling to those people.
And house prices are falling. The latest Corelogic figures show the largest monthly fall in six and a half years.
Typically household goods are bought when people move, renovate, or spend extra because their houses are worth more.
And while our population is rising (which in theory means more people need to buy stuff), the amount of goods we're buying is stagnant: bad news.
WHERE IS THE PRESSURE COMING FROM?
Our retail spending isn't only influenced by the value of our home.
ANZ Senior Economist Jo Masters told news.com.au that sharp increases in spending on non-discretionary goods, like power and petrol, were putting downward pressure on retail spending.
"Retail spending has held up pretty well. But it may be as house prices become more widespread and more embedded and you start to get consumers respond," she told news.com.au.
The latest retail sales figures from the ABS showed a slight improvement for June. But this is still a world away from retail spending growth just a few years ago, which was almost three time as high.
The story is worse in the subset of that retail data which deals solely with household goods. Those figures were up 0.3 per cent in June, below the 0.4 per cent total rise in retail sales. But that's after three months of declining household goods sales growth, all of it running significantly under population growth and in a market where sales were growing.
As Crikey's Alan Austin pointed out yesterday, the figures show an actual decline when taking into account population growth and inflation.
WILL RENOVATORS SAVE THE DAY?
Even the Australian Retailers Association Executive Director Russell Zimmerman was willing to admit household goods weren't having a good time of it.
In a statement to news.com.au, he said the falling spending was, "cyclical" and that it would improve if housing does.
But CommSec Senior Economist Ryan Felsman said Australia was in a better economic situation than Canada was. He said the key variable to look to was unemployment, which is now at a five and a half year low.
He also predicted that although house flipping might fall away as the opportunity for price growth does, that some Aussies might choose to renovate their homes and therefore boost household goods spending.
"Aussies may stay put and renovate their homes given the potential capital downside (and stamp duty costs)," he said.
"There may be less 'flipping' of homes, but alterations and renovation work may increase, boosting demand for these goods - and prices."
And Aussies do renovate. Finder data shows that 34 per cent of Aussies had renovated their homes, with kitchens and bathrooms the most popular rooms to renovate.
And the cost of these rooms isn't cheap - with average spends over $10,000.
So while Aussies are staying put in their homes, retailers will be hoping enough of them will be taking inspiration from The Block, and fixing up their current homes.
- David Ross is a freelance journalist. Follow him on Twitter: @FakeDavidRoss