Rejoice! Australia’s residential housing correction is over… but what next for the Australian economy?

So far, the hypothesised ‘great’ housing crash has resulted in a relatively modest nationwide peak-to-trough fall of 10.2% between Jan-18 and July-19. The catalyst for the eventual recovery has been the surprise re-election of the Coalition Government, which removed the risk of anti-housing policies proposed by the ALP, and further interest rate cuts by the Reserve Bank (RBA).

The uptick in housing prices should lead to improved turnover in the established home market, as the two are highly correlated. This will provide modest support for real estate agents and household furnishing sales but is unlikely to spur any wider economic activity.

The fall in interest costs is helpful but the real litmus test for household spending is the total cost of debt repayments, represented by interest plus principal repayments. As shown in the chart below, interest costs have fallen to historical levels, but debt costs remain significantly above the long-term average at 16% of income.

*RBA series (excluding interest payments and income generated by unincorporated enterprises).
†assumes 20 year term, at 50 basis point discount to average interest rate for owner-occupier mortgages; interest-only for investor mortgages; 5 year term. At 1% premium rate for non-housing debt.

High debt servicing costs combined with meagre wage growth and a weakening employment market will lead many households to pocket the rate cuts and reduce debt rather than increase consumption spending, thereby limiting the wider economic benefit. Evidence given by the Commonwealth Bank (CBA) to Parliament supports this view, with the bank indicating that just 6.9% of borrowers had proactively elected to reduce their repayments, with the vast majority continuing to pay the same monthly amount.

High indebtedness means that conventional monetary policy in Australia will not be enough to lift the country out of the economic sludge that has clogged growth pipelines like the arteries of a pack-a-day smoker. Without fiscal stimulus (politically unpalatable), quantitative easing (questionable effectiveness) or significant regulatory & micro economic reforms, Australia will rely on population increases for growth and households will continue to endure a per capita income recession - we term it, a household cashflow recession.

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