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Matthew Hassan, Research Analyst at Westpac, suggests that wider spill-overs from Australia’s housing correction are a key risk but wealth effects still difficult to pinpoint, even at a state by state level.

Key Quotes

“With the previously strong Sydney and Melbourne housing markets swinging into corrections, a key area of interest is the extent to which this may have spillover effects on wider activity. In particular, so-called ‘wealth effects’ of asset price moves on consumer demand present a key downside risk to the outlook.”

“Looking at house price cycles, consumer activity and variations in sentiment components at a state level offers a way to try and tease out some of these effects.”

“It should be remembered that in most cases dwelling price cycles are related to wider macro-economic cycles and shocks. Indeed, the RBA Governor has in the past pointed to evidence that wealth effects may have more to do with wider economic factors driving incomes and expectations for income than specific impacts on individual balance sheets.”

“Turning to the sentiment detail, price booms are associated with an average 5ppt uplift in sentiment. Those with evidence of wealth effects tend to see more muted gains but more heavily concentrated in expectations for the economy. The average hit during price corrections is 12ppts although this undoubtedly reflects the additional impact of real economy and interest rate developments.”