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Media Release

CBA research: Falling home prices weigh more on consumer spending

Falling home prices weigh more on spending

While overall household satisfaction across Australia was up in Q1, the negative ‘wealth effect’ is having more of an impact on consumers.

Commonwealth Bank’s Chief Economist Michael Blythe today released his latest Household Indicators Report, highlighting while the negative ‘wealth effect’ of falling home prices is gaining traction, overall household satisfaction improved over the last quarter.

Weak income growth continues to weigh on household spending and the drop in house prices is beginning to weigh larger on consumer activity. It’s not all bad news for the consumer with pressures from day-to-day household bills such as fuel, power, education and transport easing.

This goes to explain the rise in the Household Satisfaction Index which lifted in Q1 2019. While the rise in satisfaction was partly seasonal over the summer months, Mr Blythe said the improvement was larger than usual. “The lift was concentrated in Household Satisfaction Index components relating to housing, education and health. Partial offsets came from the environment, life satisfaction and work-life balance,” he added.

“The combination of high household debt, weak income growth and household budget pressures have been in play for a while now. More recently, falling house prices have added an extra overlay of concern,” said Mr Blythe.

Against the backdrop of the RBA’s decision to leave the cash rate on hold this week, Mr Blythe suggests income tax cuts rather than interest rate reductions are the better choice to stimulate consumer spending.

“Tax cuts benefit most consumers, not just the one-third with home loans. They place cash in the hands of consumers while borrowers, in most cases, have fixed their repayments in dollar terms and would have to request a variation from their mortgage provider to free up some spending power.

“We are in the somewhat odd situation where some policy makers like the RBA are trying to boost inflation rates while others are actively restraining it,” Mr Blythe said.

Editor’s Note: As the largest financial services organisation in the country, Commonwealth Bank is well placed to obtain insights into the trends and issues in the household sector. Mr Blythe’s Household Satisfaction Report looks at trends in household income, spending and wealth on a quarterly basis.

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