Discretionary spending falters at expense of housing bubble

Two years ago we ran an comprehensive story on what we believed would be the effects from propping up the housing market with the First Home Owners Boost. Titled Time to pick and choose: Housing or Jobs we suggested that propping up and keeping house prices artificially high would eventually see discretionary spending fall, once the capacity to borrow for any shortfall dried up. Simply put, something has to budge in the household budget, if house prices were to continue to outstrip wages. At the time we wrote :

The housing market remains the key to the problem. The longer house prices remain artificially high in comparison to household incomes, the more households will need to spend on this expense, and hence the less money that can be spent on other goods and services underpinning domestic jobs.

Two years later and the effects is starting to take effect. Blair Speedy from The Australian newspaper reported yesterday :

IF the army is looking for somewhere to put a new shooting range it might want to consider one of Australia’s many shopping malls.

Judging by the number of lunchtime shoppers this week in Melbourne Central, one of Australia’s busiest shopping centres, they could be pretty certain they wouldn’t hit anybody.

Growth in annual retail turnover for December is now at the weakest level since 1982 and its believed the market has deteriorated further. According to Russell Zimmerman, the Executive Director of the Australian Retailers Association “The first week of sales after Christmas went quite well, but beyond then, things slowed right down.” He told the Australian, that some retailers reported falls of up to 15 percent last month (January).

Department Store Myer CEO Bernie Brookes, reported a “significant and rapid deterioration” in sales in January. Mr Brookes, a retail veteran of more than 30 years said “I’ve never seen the consumer so fragile,”

Chief Executive of the Australian National Retail Association, Ms Margy Osmond said “Clearly their [customers] attitude is now that it has to be a bargain, and it had better be the best bargain around, before they’ll spend on anything discretionary.”

According to the article published in The Australian, the retail sector contributes some $262.6 billion dollars or 19 percent of Australia’s GDP. The sector is Australia’s largest employer, accounting for 11 percent of the workforce. Retailers will now have to start cutting expenses in a bid to survive, and will do this by cutting staff hours. A “good” thing for the government is this shouldn’t show up in unemployment figures, provided employers cut hours and not positions, as a person only needs to work for 1 hour a week to be deemed employed, although the aggregate number of hours will trend down. However, for employees, any cuts in hours could threaten the ability to meet weekly expenses including mortgage or rent payments in already extremely tight budgets.

But like a good Real Estate Agent, Ms Margy Osmond sees light at the end of the tunnel and puts on a brave face. “Retail has had a tough 18 months, and things will remain challenging this year, but ultimately the sun will shine; there will be a recovery,” she said. “The basic economic fundamentals are good, we’ve got strong employment figures, confidence is particularly high in some parts of the country . . . as long as we see steady underlying economic conditions, there must be a recovery at some point.”

We don’t share the same level of enthusiasm. Once the housing market starts to correct, the negative wealth effect should see spending impacted further. Then, as we wrote in our report in 2009, “Not only do we have to cut back on spending and live with in our means, we also have to start paying down some of this mountain of [household] debt we have in our names. For every dollar a household spends in paying down debt, is one more dollar not spent in the economy supporting jobs. It’s a double whammy.”

» Store owners blue as shoppers skip retail therapy – The Australian, 12th February 2011.


  1. I believe the lacklustre performance is due to unseasonable weather, as well as the impact of higher interest rates on disposable income. The outlook for retail spending is very bad, with a probability of more extreme weather events and more interest rate rises, while employment and wages growth are also looking decidedly shaky. One reason that Aussies are not spending like they used to is because many still can’t get jobs or aren’t able to work the number of hours that would enable them to meet everyday living costs, especially astronomical housing costs.

    Darren Bloxwich
    Australian Property Crash Forum

  2. 2GB Sydney Radio, 14-Feb-2011, around 14:25. The Ask a Real Estate Expert (John Linderman) has just stated, Australia is not in a bubble, houses are selling like hot cakes, and the longer you hold on to your house, the higher the price you will get, cause house prices keep going up. Only first home buyers have thinned in numbers, to the tune of 50%. BUT that’s no problem, if you want to sell your house, it will go before you blink. JUST hold onto it you’ll get a better price.

    Shoud hear the callers, someone who bought a house for $175K not too many years ago, wants $540K for it now. Well sh*t a brick.

  3. Something I’ve never heard discussed:

    Housing is pretty much an essential thing for everyone – buying or renting.

    If the price of housing goes up, and is propped up by government policy, then sooner or later the cost of that housing must end up getting factored into everyone’s expectations and hence costs of everything else in the economy?

    Isn’t this what we’re seeing now? The government props up housing, so we start to see trickling down inflation in everything else (ironically reducing people’s living standards!).

  4. @Jon,

    In a way yes, it indeed does happen in that way. The rest of the developed or leading economies were or are the same. Nobody in Japan ever imagined house prices would be culled, and the U.S. Especially the U.S where it was overtly rammed into their head, “…no problem, house prices always go up…”. Japanese thought the same too. Both countries now have housing easily affordable to many, if you’re earning a decent income.

    In Australia, this “we’re different” seems to be coming out true, well at least for now. I think one way housing prices can come down here is if most people here snap out of this hypno-maniac-property-aquisition-syndrome. As you have mentioned, it does seem to make some people (not all) poorer instead of wealthier. Mad World.

  5. Actually, lets not forget general cost of living expenses, aside from housing, which has skyrocketed in recent months :
    1) utilities – prices have absolutely skyrocketed due to need to upgrade aging infrastructure to meet not just existing population needs, but population growth due to immigration. This affects some states more than others
    2) food bills – prices have soared on the back of US money printing and a downturn in supplies (bad weather etc) and also more mouths to feed (ie population growth overall)
    3) high petrol prices due to speculation, instability in middle east, but mostly on US money printing (again)
    3) inflation and rising cost in China has mitigated our high dollar somewhat. Cheap China products are no longer cheap at normal prices now. A baby jumpsuit that used to cost $7 now cost $12. Why should I pay $12 when business has been arguing time and again that we should switch manufacturing to China to get cheap goods ? No, I will wait until it is discounted at $7 or $8 which is what I would have normally paid.

    And now Julia wants to introduce a carbon tax ???? With the money used to compensate carbon based companies to compensate them for their paper loss on their asset values ????? This is going to be for Julia what workchoices was for Howard – an election loser !!! Maybe the economy will tank before the carbon tax is implemented, and hopefully it will be consigned to the dustbins of history

  6. That’s exactly right Jon. The tragic thing is that this issue is never discussed in the mainstream media.

  7. Paul, not sure if the huge drop was seasonality or investors getting cold feet but some of the brokers I’ve spoken to are saying the implementation of the changes to the NCCP Act (Jan 2011) have had an impact.

    More details http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg209.pdf/$file/rg209.pdf

    Not sure about the wider banking sphere, but ING are applying the guidelines to any credit issued in excess of 50% LVR – most loans written these days. Whether it changes the approval criteria or simply causes a major workload backlog, time will tell.

    Today’s announcement by Moodys to review Aussie banks and reaffirm their negative outlook could make things more interesting.

  8. I think one of the reason Australia has been “different” to housing bubbles overseas is the restriction of available building land. I am a small builder and finding reasonably priced land to build on is almost impossible here in Melbourne. Town planners are making sure there is an under supply of land. Sure more land has been re zoned, but it is being “land banked” by the “Big boys”.

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