Consumers ‘constrained’ by falling property prices

Retailers are positive heading into the Christmas period after a relatively good year so far, says Deloitte Access Economics. But falling property prices could darken the picture for the year ahead.

It’s also been another year in which the household savings rate has tumbled as income growth fails to keep up with spending growth.

Crucially, says Deloitte, falling property prices mean consumers will feel more constrained when it comes to spending on retail goods.

House price weakness

According to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report (Q4 2018), retail spending moderated in the September quarter as the combination of weak wage growth and falling house prices weighed on consumer sentiment.

The report found that house price weakness is more significant than previously expected in 2018. Employment growth, however, is exceeding expectations, offsetting some of this weakness.

Deloitte predicts another year of solid retail growth. It estimates that retail volumes will expand 2.6 per cent in 2018-19, before accelerating to 2.9 per cent in 2019-20.

“Retailers are optimistic leading into the Christmas trading period, despite difficult operating conditions,” Deloitte Access Economics partner and Retail Forecasts principal author David Rumbens said. “But is this confidence misplaced?

“While 2018 has been pretty good for retailers, both in terms of sales and profits, it’s also been yet another year where spending growth has exceeded income growth.

“The sharp fall in the household savings rate is evidence. For some consumers, it’s meant more spending on the credit card. For some, it’s redrawing equity. For others, it’s putting less away for a rainy day.

“That’s been fine while wealth has been increasing. But with Sydney and Melbourne house prices now falling, consumers are running on empty. There will be some tricky transitions for next year.”

Wage growth needed

Property prices have now fallen for 13 consecutive months, says Mr Rumbens. Tighter credit availability has reduced demand, especially among investors. This, combined with a continued increase in housing supply, is exposing what was significant overvaluation, says Mr Rumbens.

“The good news, though, is labour income growth is rising,” he said. “Labour income will need to keep rising to offset the drag to consumer spending from lower Sydney and Melbourne property prices.”

Online impact

New buildings in retail have dropped sharply, says Mr Rumbens. Instead, the investment dollars are going towards digital.

“Vacancy rates are also starting to rise more broadly,” he said. “A number of high-profile retailers are reducing their store footprint.

“There’s plenty more growth in digital channels, which has been a focus of retailers heading into Christmas.”

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