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.