Why you may not be spending a lot of money lately
Have you been spending less and less in recent months or years? You may not be alone – Australians have not been spending as much, thanks to the “wealth effect” from falling house prices.
The wealth effect is an economic concept that refers to a change in consumer spending based on their wealth. If the value of assets – such as house and shares – is rising, consumers will feel more financially secure and therefore more confident to spend more and, usually, save less.
However, if the value falls, consumers are more likely to hit the brakes on spending.
This theory is especially relevant now in Australia, as the country has continued to see property values decline since around September 2017 after four years of strong growth.
For example, if you bought a house in Sydney in mid-2017 for $1 million, it is now worth only $861,000 – or $139,000 less – thanks to the 13.9 per cent plunge in dwelling values as recorded by CoreLogic.
The wealth effect is prominent in Australia. For example, 344,088 cars were sold in the calendar year to April, representing an 8.1 per cent drop from the previous year’s tally. Retail spending growth has also remained flat at a year-on-year rate of 2.7 per cent to February, with consumers spending less and less on discretionary items such as clothes and department store goods.
And this trend is likely to continue. Investment management company AMP Capital expected that weak wages growth and further declines in home prices will lead more people to spend less and save more over the next one to two years, taking off around 1 to 1.5 per cent from consumer spending growth.