Stronger housing market extends 'wealth effect'

According to research from the Reserve Bank of Australia, motor vehicle spending is the form of spending most sensitive to changes in consumer wealth.

The CBA report used its own spending data with Google Trends to provide a view on the changing spending behaviours of Australians and the potential implications for the economy.

The results highlighted that home-buying intentions eased back a little in January, but the strong upward trends remain intact.
Readings in the report remain at levels that indicate further gains in dwelling prices are in the offing, as well as a turn in the residential construction cycle and a positive wealth effect that should help consumer activity.

Buying intentions for motor vehicles have turned decisively higher, according to the report, albeit from a low base.

The improving trend is all the more significant because of RBA’s research, which has revealed spending patterns on motor vehicles are most sensitive to changes in wealth.

Commenting on the report, CBA chief economist Michael Blythe said trends in the remaining HIS measures are mixed but on the soft side overall, citing the Australian bushfires and coronavirus as having a potential negative impact.

“There are clear signs of a turndown in education-spending intentions and, especially, travel-spending intentions,” Mr Blythe said.

“These sectors have likely been impacted by the combination of the devastating summer bushfires in Australia and the policy response to the coronavirus. Retail, health and fitness, and entertainment-spending intentions all look to be tending sideways.”

“The drag from falling construction activity on consumer spending and the broader economy could be over by mid-year.”

Mr Blythe added, however, that a positive wealth effect that has led to stronger motor vehicle spending intentions could extend to other parts of consumer spending.