MELBOURNE INSTITUTE Applied Economic & Social Research Monthly Bulletin of Economic Trends: Households and Household Saving August 2018
Released at 11am on 23 August 2018
Housing and households Consumption and disposable income: Consumption remains solid but disposable income is exhibiting slow growth. Household debt: Households continue to accumulate debt, although this is backed by high asset values. Housing market cools: Consumers expect lower prices but are uncertain about whether to purchase. Outlook: Falling house prices are likely to continue in the short term. Economic Activity Table 1: Outlook for Australia 1 Actual Forecasts Actual 2017 2017 2017 2018 2018 2018 2018 2019 Calender Year Jun Sep Dec Mar Jun Sep Dec Mar 2017 2018 GDP 2.0 2.8 2.4 3.1 2.7 2.9 3.2 2.9 2.2 3.0 (1.0) (0.5) (0.5) (1.0) (0.6) (0.8) (0.8) (0.7) Household Consumption 2.7 2.7 2.9 2.9 2.6 2.6 2.3 2.6 2.7 2.6 (1.0) (0.6) (1.0) (0.3) (0.6) (0.6) (0.7) (0.7) Forecast Private Dwellings -1.2-2.6-5.0-1.0-1.8-0.1-0.4-1.7-2.2-0.8 (0.3) (-2.1) (-0.1) (0.9) (-0.5) (-0.4) (-0.4) (-0.4) New Business Investment 1.4 8.7 6.0 3.1 4.0 2.1 4.0 5.5 3.7 3.3 (0.3) (3.1) (-0.4) (0.1) (1.2) (1.2) (1.5) (1.5) Domestic Final Demand 2.6 3.6 3.3 3.2 3.0 2.9 3.0 3.1 3.0 3.0 (0.9) (0.9) (0.8) (0.6) (0.8) (0.7) (0.8) (0.8) Imports of Goods & Services 6.5 8.3 7.3 4.7 6.2 4.9 4.8 5.9 7.8 5.1 (-0.1) (2.6) (1.6) (0.5) (1.3) (1.4) (1.5) (1.6) Exports of Goods & Services 5.2 5.1 0.2 4.6 3.2 3.9 6.8 5.6 3.5 4.6 (2.9) (0.7) (-1.5) (2.4) (1.5) (1.4) (1.3) (1.3) Inflation & Financial Market Underlying inflation 2 1.8 1.8 1.8 1.9 1.9 2.1 2.2 2.2 1.8 2.0 (0.5) (0.4) (0.4) (0.5) (0.5) (0.5) (0.5) (0.6) Headline Inflation 1.9 1.8 1.9 1.9 2.1 2.1 2.0 2.1 1.9 2.0 (0.2) (0.6) (0.6) (0.4) (0.4) (0.6) (0.5) (0.6) 90-day Bill Rate 3 1.7 1.7 1.7 1.8 2.1 2.1 2.1 2.1 Trade Weighted Index 4 64.5 66.5 64.7 64.2 62.6 61.8 61.8 61.8 $A/$US rate (100) 4 0.75 0.79 0.77 0.77 0.76 0.74 0.74 0.74 Labour Market Unemployment Rate 4 5.6 5.5 5.4 5.5 5.5 5.5 5.4 5.4 5.6 5.5 Employment Growth Rate 5 2.0 2.7 3.2 3.3 2.6 2.3 2.1 2.0 2.3 2.6 (1.0) (0.9) (0.8) (0.6) (0.4) (0.5) (0.6) (0.5) Participation Rate 4 65.0 65.3 65.5 65.7 65.6 65.5 65.4 65.4 65.1 65.5 Wage Price Index 1.9 2.1 2.1 2.1 2.1 2.1 2.2 2.4 2.0 2.1 (0.6) (0.6) (0.5) (0.5) (0.5) (0.6) (0.6) (0.6) 1: Actual in black and forecasts in blue; values in parentheses are quarterly growth rates. 2: As measured by the Reserve Bank s trimmed mean measure of inflation. 3: Average over last month in quarter. 4: Average of 3-months in the quarter. 5: Calculated from quarterly employment numbers that are averaged over the 3 months in the quarter. Prepared by G. Lim and S. Tsiaplias, Macroeconomics@MI. Data in this report were finalized on 21/08/2018. 1
Table 2: Key statistics for households General Dec Mar Jun Sep Dec Mar Jun Fiscal Year 2016 2017 2017 2017 2017 2018 2018 16/17 17/18 Household consumption %pa 2.9 2.3 2.7 2.7 2.9 2.9-2.6 2.9 Disposable income %pa 4.9 4.3 2.6 3.1 0.1 0.9-3.2 1.4 Savings ratio 3.7 4.0 2.4 2.3 2.3 2.1-3.7 2.2 Household debt to income ratio 180.8 183.5 187.3 187.4 188.7 190.1-182.9 188.8 Consumer sentiment 97.3 99.7 96.2 97.9 103.3 103.0 102.1 98.7 101.6 Housing House prices %pa 7.7 10.2 10.2 8.3 5.0 2.0-7.9 5.1 Housing debt to income ratio 133.4 134.7 136.9 137.7 139.1 140.1-134.2 138.9 Housing interest payments to income ratio 6.9 7.0 7.2 7.3 7.3 7.5-7.0 7.3 Housing finance %pa -3.4 1.0 2.2 4.6 4.5 3.0 0.2-0.9 3.1 Dwellings financed by first home buyers % 13.8 13.5 14.9 17.4 17.9 17.4 18.1 13.8 17.7 Consumer dwelling index 102.9 99.6 90.9 95.2 100.6 104.5 105.7 100.7 101.5 Wealth ratios Household assets to income 924.0 940.4 956.3 956.6 968.5 960.9-930.1 962.0 Housing assets to income 505.1 514.9 528.0 527.0 531.2 526.0-508.6 528.1 Household financial assets to income 388.4 395.0 397.8 399.0 406.8 404.5-391.1 403.4 * Values in blue do not include (unavailable) data for June 2018 and are therefore estimates. 2
Household consumption is solid, but In last month s MBET we saw that State Final Demands (SFDs) had grown for three out of the five major states in the March quarter of 2018: NSW (0.7%), VIC (1.9%), and QLD (0.5%). In contrast, SA and WA SFDs fell by 0.2% and 1.1%, respectively. In annual terms, four out of the five major states exhibited relatively strong growth in SFD (VIC 4.9%, NSW 3.7%, QLD 3.1% and SA 2.1%) with WA lagging due to weaker investment. In line with the results for the major states, aggregate consumption has remained relatively robust, growing at 2.9% per annum for a second consecutive quarter. It therefore appears that consumption in the 17/18 fiscal year will likely exceed that of the preceding fiscal year (Table 2). There are, however, a number of warning signs regarding household consumption growth in the short to medium term. Consistent with weak wages growth, household disposable income increased by a mere 0.1% in the December 2017 quarter, rising to a still weak 0.9% in the March quarter. In contrast, disposable income rose by 4.9% and 4.3% respectively for the December 2016 and March 2017 quarters (Figure 1). Given the observed propensity for household spending and the weak growth of disposable income, it is unsurprising that the household savings ratio has declined in the last few quarters. Table 2 shows that the ratio is likely to have fallen significantly in FY17/18, from approximately 3.7 to a value only slightly greater than 2. To appreciate the magnitude of the decline, Figure 2 shows the household savings ratio since 2000. The figure shows a dramatic increase during the GFC as households increased their savings in the midst of the significant financial and economic uncertainty during this period. Following the GFC the savings ratio stabilised but has been falling fairly rapidly in the last few quarters. At the same time, the growth rate of household disposable income has also declined suggesting that households may be constrained in terms of their ability to reduce their spend. To glean additional information about this issue, it is useful to examine the decomposition of household spending. Figure 1: Household disposable income (per capita annual growth) Figure 2: Savings ratio Source: ABS Source: ABS 3
Figure 3 shows retail spend since 2010 disaggregated into food and non-food spending. In the past few years, non-food spending has been growing at a faster pace than its food counterpart. However, we have recently observed a shift in the spend decomposition, with non-food retail spend growth declining significantly. Conversely, food retail spend has been growing fairly rapidly suggesting that households are spending a greater portion of their disposable income on needs rather than wants. A useful way to glean the household s response to weaker disposable income is to assess consumer sentiment. Figure 4 shows the Westpac-MI Consumer Sentiment Index since 2010. Sentiment has been relatively weak in the past few years, after rising over the period 2011 to 2013. However, there has been a recent (albeit unclear) upswing in the index suggesting that consumers are more optimistic about future economic conditions. The March National Accounts data also provides us with updates on key ratios regarding household assets and debt. Figure 5 shows that the recent positive trajectory of the household debt to income ratio has continued unabated in the March quarter, whereas the assets to income ratio fell slightly. It is clear, however, that debt continues to be backed by valuable assets. In line with record-low interest rates, the ratio of housing interest payments to household income continues to be low, albeit creeping upwards. As monetary policy tightens, this ratio will inevitably increase thereby further dampening an already weak housing market. The decline of the housing market is examined further in the next section. Figure 3: Retail trade (annual % growth) Figure 4: Consumer sentiment index Source: ABS. Source: MI Figure 5: Household debt and asset ratios Figure 6: Housing interest payments to disposable income ratio Source: RBA. Source: RBA 4
The housing market slips into negative growth In May s MBET we noted that house price growth had eased considerably. Officially, house prices exhibited double-digit annual growth in the March and June quarters of 2017, falling to 8.3 per cent in the September quarter and 5.0 per cent in December. In the March quarter of 2018, annual house price growth declined further to 2.0 per cent, with Sydney exhibiting negative annual growth of -0.5 per cent. The Melbourne market, on the other hand, exhibited relatively strong growth of 6.2 per cent. Unofficial estimates indicate that the downward trend in house price growth continued in the June quarter. In particular, it appears that dwelling prices exhibited negative annual growth, with Melbourne following Sydney into negative growth territory. Although house prices have been rising in recent years, overall auction clearance rates have been on a noisy decline since the beginning of 2017. This decline has seen auction clearance rates fall from over 70 per cent in 2016 to their current value of approximately 58 per cent. Looking forward, the Melbourne Institute s House Price Expectations Index shows that consumers expect house prices to fall further in the short term. In August, the proportion of consumers expecting a house price fall of up to 10 per cent increased (relative to August 2017) by a significant 13.9 per cent. In contrast, the proportion expecting house price growth of up to 10 per cent fell by 15 per cent. Figure 7 shows this downward trend over the past two years, with the proportion of individuals expecting reasonable price growth likely to fall below the troughs observed in 2011 and 2015 respectively. Another forward-looking measure of the housing market is the Melbourne Institute s Dwelling Sentiment Index. This index examines whether households believe it is a good time to buy a dwelling, and therefore compliments the house price expectations index. According to the Dwelling Index (Figure 8), dwelling sentiment has exhibited a long-term decline since 2012, although it has recently shifted upwards. This shift, however, is relatively minor and indicates the consumers are cautious about housing market conditions. Importantly, the index provides no indication that, in the short term, consumers are confident about making housing purchase decisions. Figure 7: House price expectations Figure 8: Dwelling sentiment (Good time to buy a dwelling) Source: MI. Source: MI. 5
First home buyers stagnating after a recent increase in activity The 2017 stamp duty exemptions announced by the Victorian and NSW governments produced an immediate jump in the proportion of first home owners in NSW and Victoria. Further information on this is available in the February and May issues of MBET. In May s MBET, we observed that the stamp duty exemptions had not produced a trend in the proportion of first home buyers. They did, however, achieve a positive proportional shift (or jump) in first home buyers. Most of the shift took place over July and August where the proportion of first home buyers rose by a significant 4.1 per cent in NSW and by 3.9 per cent in Victoria. It is unclear whether recent activity, such as Victoria s fall in May, is the result of other factors. Figure 9 shows that the proportion of first-home buyers in NSW (14.8 per cent as at June 2018) now exceeds that of South Australia (13.8 per cent). In contrast, the equivalent values for the two states in June 2017 (8.8 and 13.5 per cent respectively) were at complete odds with their current values. Similarly, the proportion of first home buyers in Victoria was 14.4 per cent in June 2017 (versus 19.9 per cent in Queensland). In June 2018, however, first home buyer proportions were almost identical (19.6 per cent in Victoria and 19.5 per cent in Queensland). Interestingly, the impact of the first home buyer stamp duty exemptions appears to be more long-lived in NSW than Victoria. In this respect, the proportion of first home buyers in the latter state has fallen slightly from its peak of 19.7 per cent in November 2017 to its current value of 19.6 per cent. In contrast, first home buyer activity in NSW appears to be rising. A related issue is the spillover effects stemming from measures such as the stamp duty exemptions (and, just as importantly, the curbing of lending to housing investors) on the distribution of housing finance. Owner-occupiers (excluding refinancing) are now responsible for around 47 per cent of all housing finance, with the proportion of finance going to investors being around 30 per cent (excluding investors who are engaging in development). Figure 10 shows the overall trend in the proportion of housing finance to owner-occupiers and investors. The statistics exhibit a clear decline in the housing finance provided to nondevelopment investors, and an associated increase in the proportion of activity attributed to owner-occupiers. Further analysis of the distribution of housing related finance indicates an upswing in the refinancing of loans by owner-occupiers. The proportion of housing finance for owneroccupier refinancing is currently at a little under 20 per cent and at its highest point since October 2016. Accordingly, although the proportion of owner-occupier financing for established dwellings is rising, the data show that a substantial component of owner-occupier housing finance is not attributable to greater participation in the current housing market. Overall, notwithstanding weaker house prices and stamp duty exemptions, it is not clear that first home buyer activity will continue to rise. In particular, it appears that significant house price depreciation will be required to induce any meaningful increase in first home buyer activity (over and above that stemming from existing first home owner stamp duty exemptions). 6
The stability of the housing market Recent research by Lim and Tsiaplias (2018) examined the relationship between house prices, disposable income, and drivers such as interest rates. 1 The authors found that when interest rates fell below a certain threshold, the house price to income ratio was more likely to become unpredictable and unstable, potentially exhibiting periods of sharp changes and volatility. Figure 11 shows the ratio of house prices to disposable income for Sydney, Melbourne, Brisbane, Adelaide and Perth. It appears that the ratios often co-move but that there are also periods when movement is idiosyncratic or restricted to a subset of the major cities. In particular, it is clear that the ratio rose dramatically in Sydney and Melbourne over the past few years. During the same period, the ratio was relatively flat for the rest of Australia. The authors found that Australian housing markets are likely to exhibit greater sensitivity to factors such as housing supply, inflation and consumer expectations when interest rates are low. This can produce sharp changes in some cities but not in others. The authors also argued that the resulting instability could be offset by introducing measures that explicitly or implicitly increased the cost of housing-related finance. The response of Australian regulatory bodies (in particular, the Australian Prudential Regulatory Authority (APRA)) to housing market conditions has been largely consistent with these findings. In response to sharp house price changes in recent years, APRA initiated a number of restrictions on bank lending (focusing on investors) in order to forestall any potential instability. These measures have resulted in higher relative borrowing costs for investors, in addition to more stringent lending conditions (including a reduction in the proportion of interest-only loans). Clearly, this has impacted negatively on a key driver (viz. housing investors) of recent housing demand. Another useful forward-looking measure of housing market stability is to examine the extent to which consumers expect inordinate house price changes. The Melbourne Institute s House Price Expectations Index examines the distribution of house price expectations, including the extent to which individuals expect house prices to fall by more than 10 per cent. A fall of this magnitude would, of course, be consistent with significant housing market instability. Figure 12 shows a time series of the proportion of respondents expecting house prices to fall by more than 10 per cent house price expectations over the period 2010 to the present. Although it only reflects a small proportion of consumers, it shows that there is considerable variation in the extent to which consumers anticipate large price falls. Its current value is not overly high but, in the context of the entire time series, has been tracking upwards. In this respect, the proportion of survey respondents expecting a greater than 10 per cent price fall in house prices rose from an average of 2.1 per cent for the three months to August 2017 to 3.7 per cent for the three months to August 2018. For comparison, the corresponding value in 2016 was 2.5 per cent. The current proportion is therefore considerably higher than that observed over the past two years and we will track this value going forward. 1 Lim, G.C. and Tsiaplias, S. (2018). Interest Rates, Local Housing Markets and House Price Over reactions, Economic Record 94(S1), pp. 33-48, https://doi.org/10.1111/1475-4932.12402. 7
Figure 9: Proportion of first home buyers Figure 10: Proportion of housing finance to owneroccupiers and investors Source: ABS. Figure 11: House price to income ratios Source: ABS. Figure 12: Proportion of respondents expecting house prices to fall by more than 10 per cent Source: ABS. Source: MI. Red dashed line is 3-mth moving average. Table 3: Precision of year-ended Forecasts for Australia Precision of (year-end) Forecasts 2018 2018 2018 2019 Calender Year Jun Sep Dec Mar 2018 Australia Economic Activity GDP 0.6 0.9 1.1 1.2 0.7 Consumption 0.5 0.8 1.0 1.1 0.7 Dwelling 2.3 2.4 2.5 2.8 1.9 Business Investment 5.2 6.0 6.7 7.5 4.6 Import 2.5 4.2 5.8 6.6 3.7 Export 2.6 3.4 4.0 4.4 2.9 Inflation & Financial Market Underlying Inflation 0.2 0.3 0.4 0.3 Headline Inflation 0.4 0.5 0.7 0.6 90 day bill 0.3 0.5 0.7 0.6 Trade Weighted Index 3.3 3.7 3.9 2.3 Labour Market Unemployment Rate 0.1 0.2 0.3 0.3 Employment 0.2 0.4 0.5 0.5 Participation Rate 0.2 0.3 0.4 0.3 Wage Price Index 0.5 0.6 0.7 0.4 8
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