It is uncertain how potential future declines in wealth, that would more than likely be prompted by falling house prices, would impact consumption. This is primarily because Australian households are unaccustomed to this occurring.
But as the RBA’s Financial Stability review warned this week this is becoming a significant future risk. Both as house prices rise and imbalances in the investor segment of the property market continue to build. It is notable that at least in this data series back to the 1990s that household net worth had never declined on an annual basis before the financial crisis. It has done so once during and once afterwards. The latter coinciding with interest rate rises and dwelling price declines.
We expect that households will have to get used to this cyclicality in their net worth. And this is likely a factor that will drive a new paradigm of thrift in which households exercise greater prudence than in the pre-financial crisis period.
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