Housing price rise to open consumers’ wallets

House prices are driving a ‘wealth effect’ that’s creating a reservoir of spending firepower.

Sydney house prices are growing at their fastest monthly pace in more than three decades, data released on Monday revealed.

The break in the spending drought could be close, as booming house prices drive a “wealth effect” that is creating a reservoir of spending firepower, according to new research by investment bank UBS, with sales at the Black Friday and Cyber Monday promotions a key test for a much-needed retail recovery.

The analysis, alongside anecdotal evidence of bumper sales numbers over the Black Friday weekend, will raise hopes that three Reserve Bank rate cuts since June, tax relief and surging house prices may finally be translating into stronger consumer confidence and spending.

UBS analysts Ben Gilbert and Pieter Stoltz conducted a deep dive of the mindset of Australian shoppers to discover results that were positive for the broader consumer outlook.

READ MORE: Housing on a fast track to recovery | HSBC sees home prices gaining faster

The UBS report reveals that households are feeling wealthier, with 29 per cent of respondents to a survey positive on their 12-month forward finance outlook versus only 8 per cent in a UBS survey conducted in May.

Sydney house prices are growing at their fastest monthly pace in more than three decades, data released on Monday revealed, and almost half of those surveyed by UBS said they intended to embark on a home ­improvement project in the next six months.

And while those surveyed told UBS that they were less likely to cut their spending in the next 12 months, a positive for consumption, they also said they were more likely to increase their savings over the next 12 months — possibly reflecting how tax cuts are being used to repay debt.

“I think we have a situation that when we look at when this survey was conducted previously, it was just prior to the election and there was a lot of negative discussion out there and I think there was no secret the consumer wasn’t spending as much, given some concerns over the election,’’ Mr Gilbert said.

“This survey was done post the election and when we are starting to see probably a lot more optimism, a positive backdrop out there for house prices, tax cuts and rate cuts flowing through as well, and so it feels to us there is a lot more confidence and comfort out there around the whole ‘wealth effect’.

“The value of housing is going up but it is yet to translate into spending as people are tending to save more money.’’

Leading retailers were less equivocal.

Ruslan Kogan, the founder and chief executive of Kogan.com, which sells everything from mobile phones and camping equipment to pet insurance and skateboards, had one of its best days in 14 years on Black Friday. Mr Kogan told The Australian that sales for Friday leapt to $9.8m from $5.4m, a gain of more than 80 per cent.

“We have been doing Black Friday sales since 2011 so we were one of the first companies to recognise the trend overseas and to bring it to Australia,’’ Mr Kogan said.

“I don’t know what others are doing, but we have seen incredible results. This year was the biggest day we had in our 14-year history, it absolutely smashed every record in our business.’’

Harvey Norman chairman Gerry Harvey told The Australian that Black Friday drove a huge ramp up in shoppers to its stores.

“It was amazing because Friday, Saturday and Sunday we were up on last year and it is just getting stronger and stronger, and it has now become a major event where it is bringing a lot of people into the stores. Our online business is up on it but that is minuscule compared to what happened at the shops, it has been a big kick along for retail in general.”

However, he cautioned that he believed it was bringing forward sales that would have happened later in December near Christmas.

“It doesn’t mean Christmas and Boxing Day will be bad but it would have been better if you didn’t have these three days, but overall it will have the effect of raising retail sales across the board.”

The anecdotes will also offer some welcome relief to economists at the Reserve Bank and Treasury, who have been watching with alarm a series of poor economic indicators in recent days and weeks, including a drop in retail sales volumes over the year to September — the first annual drop since the early 1990s recession.

The RBA and government will need a pick-up in consumption to achieve what many economists believe are overly optimistic predictions of a return to trend growth in the vicinity of 2.75 per cent in 2020.

Over the year to June, a collapse in consumption and residential construction dragged GDP growth down to 1.4 per cent, its weakest pace in a decade.

A contraction in retail sales over the year to September, dis­appointing construction work done and the threat of a virtual business investment strike in this financial year have contributed to a gloomy mood around the country’s economic prospects.

The RBA is expected to hold the cash rate steady at 0.75 per cent when it meets on Tuesday afternoon, and has flagged it would prefer to wait and see how its policy easing will work its way through the economy.

For the government, under pressure to do more to boost growth via more fiscal stimulus, Wednesday’s national accounts loom as a key test of its economic credentials, as well as its commitment to achieving the first budget surplus this financial year after a decade of deficits — a commitment the Treasurer is expected to confirm at the mid-year economic budget update in two weeks.

“Growth hasn’t been strong enough or broad enough under the Liberals, and too many economic indicators have been going in the wrong direction,” Labor Treasury spokesman Jim Chalmers said. “We already know enough about weakness in the economy under the Coalition to know they need a plan to turn things around.”

Josh Frydenberg pushed back, pointing to the government’s $3.8bn in accelerated infrastructure spending and “record spending on health and education”, as well as its investment in 8000 new apprenticeships.

“The domestic and inter­national challenges are a stark reminder of why we must stick to our economic plan of lower taxes, more infrastructure to boost productivity and returning the budget back to surplus so we can meet the challenges that lie ahead,” Mr Frydenberg told The Australian.