The existential pain of falling household wealth

Growing weariness among consumers

Of course, these are aggregated numbers and market conditions depend on the suburb you live in and the type of property you bought. But it gives you an idea of just how many Australians could be experiencing the rare and unwelcome feeling of falling net worth.

How that feeling reverberates through our economy and society may prove one of the biggest themes of the coming decade.

Right now the debate among economists is how and whether homeowners will change their spending habits in response to feeling less, rather than more, wealthy.

Hundreds of thousands of home owners face the prospect of their house prices plunging below what they paid for them. Heather McNeill

The early signs are not great: consumer confidence data suggest a declining trend, particularly among home owners. The household savings rate, which has been on a steep decline for years, ticked higher in the December quarter national accounts, also suggesting a growing weariness among consumers.

The Reserve Bank estimates that a 10 per cent increase in net housing wealth raises the level of consumption by around 0.75 per cent in the short run, and by 1.5 per cent in the longer run. But behavioural economics suggests that we feel losses twice as much as gains – does that mean the negative wealth effect is more powerful than the reverse? It seems reasonable to assume so.

Mortgage prisoners

Selling your house for a loss is bad enough, but what if you owe more on your house than it is worth? This, known as “negative equity”, is the most toxic potential outcome for the home owner. If you look back at July 2017 when the Sydney and Melbourne markets peaked, around 7 per cent of new loans nationally were made at loan-to-valuation ratios of above 90 per cent.

Simplistically, that implies that this proportion of home owners are now facing negative equity. For further context, more than one in five of loans written back then were at LVRs above 80 per cent, so there are more who would be vulnerable should house prices fall much further.

Those facing negative equity have somewhat sensationally been called “mortgage prisoners” as they are essentially stuck: selling would leave them with debt and no asset.

Findings published by the National Bureau of Economic Research, which included the post-GFC experience for US households, suggests that negative equity reduces household mobility by around 30 per cent, although there appears to be some debate around those conclusions. Workers and families unwilling to crystallise losses are less willing to move to find better jobs, reducing the dynamism of the Australian economy.

There is also evidence that the GFC has soured younger Americans on home ownership. Owning your own home has long been the aspiration for most Australians. Yet younger Aussies are already leery of buying into unaffordable property markets, and further house price falls could lead to a further shift in attitude to homeownership among a whole new generation. The impacts could be profound: societally, politically, as well as economically.

Things could get worse

The fallout from the weakening property market obviously depends on how much further prices fall.

House values at a national level are now down more than 8 per cent, already more than in previous cycles. The previous worst experience was post February 2008, when house prices fell under 8 per cent. But the property market had entirely recouped those losses in the span of around 20 months.

In contrast, prices nationally have now been falling for 18 months, and it’s reasonable to expect things to get worse before they get better.

Household debt in this country is the highest in the world and the impetus will be towards deleveraging rather than releveraging, even if the RBA lowers rates again this year.

Indeed, one way to interpret governor Philip Lowe’s recent comments that housing supply and demand, rather than rates, are the key driver for property prices is that Lowe is seeking to break the nexus in the public’s mind between looser policy and higher prices.

The last time the central bank cut was in August of 2016 – a move that reignited a flurry of investor activity. But since then regulatory interventions have tamed the once-rampant property speculator.

All of which means potentially hundreds of thousands of more households will feel the pinch of falling net wealth in the coming months and maybe years.

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