Wealth effect drag appears imminent: Westpac

Wealth effect drag appears imminent: Westpac
Staff reporterApril 28, 2019

Australian household balance sheets are seeing significant shifts that are likely to restrain demand and are a key risk to the domestic outlook, according to Westpac's latest Red Book.

In particular, a prospective ‘wealth effect’ drag on demand stemming from the decline in house prices is a major area of uncertainty. 

Given the importance of this issue, Westpac economists will be providing more regular updates going forward.

For the most part this will be building on previous commentary profiling trends by state, looking at consumer sentiment during previous wealth effect episodes, sizing the current wealth decline, and providing some sensitivity analysis around potential wealth effects.

(Source: Westpac)

The housing correction is starting to have a clearer impact on the household balance sheet.

The total value of dwelling assets fell $270bn over 2018, reflecting both lower prices and slower dwelling completions.

The decline amounts to 40% of annual income and is about half of the peak to trough falls seen in the GFC and 2011-12 correction.

While the overall decline in net worth, including other assets, is a touch milder than our early estimates it has clearly extended into 2019.

Chart 14 shows Westpac estimates of household net worth and savings rates by state updated to Q4.

(Source: Westpac)

Recall that the ‘signature’ of a wealth effect drag is a fall in net worth accompanied by a rise in the savings rate, the latter meaning that spending is growing at a slower pace than incomes.

Also Westpac noted that these estimates are compiled from a range of annual and quarterly benchmarks, and as such should be treated as broadly indicative. 

The latest estimates show larger falls in net worth in NSW and Vic where declines are closer to 60% of annual income. That said, they also show the extent of the prior run up with net worth in both states still well above 2015 levels. 

On savings, the latest data again points to declines concentrated in NSW and Vic consistent with a wealth effect boost to spending rather than a drag. Any hint of a turn in Q1 will be a key pointer to demand.

The Wealth effect has been seen to have supported demand over 2013-17.

Falls in wealth are less likely to impact when the labour market is strong and income growth is firm.

The latest spending detail shows a clear slowing in wealth-sensitive items, slightly more so in NSW, Vic and WA.

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