FYI | Oct 18 2007
By Chris Shaw
Want a good indicator for the direction of interest rates? Check the local real estate listings, as Commonwealth Bank economist Joseph Capurso points out the value of their house makes up 53% of an average individual’s wealth.
This becomes important for the Reserve Bank of Australia (RBA) as Capurso notes the three main variables in consumer spending are wealth, income and confidence, and more wealth from rising housing prices means more confidence on the behalf of the consumer.
An example of this can be seen in Australia’s housing boom of the late 1990s and early part of this decade, which spurred an annual increase in consumer spending of 4.2% from 1998-2004 at the same time as disposable income grew at only 3.5% per year.
This meant by the turn of the decade the strong growth in house prices, debt and spending was enough to persuade the RBA to normalise interest rates, a process that has seen rates move to a little on the high side currently from what were very low levels in 2001.
Data from the Commonwealth Bank-Housing Industry Association Housing Affordability Index suggests house prices this year are again growing strongly and for the year to the end of September are up 12% for established houses, this at the same time as consumer confidence is high and income levels are growing.
As a result consumer spending has increased 4% over the year and is again growing faster than income levels, so conditions appear similar to those of a few years ago.
On its own this may not be enough to force the RBA’s hand in terms of rates, but with inflationary pressures remaining high Capurso suggests it is worth following the housing market for an indicator as to what the RBA’s interest rate intentions may be, particularly as consumer spending makes up around 60% of Australia’s economy.
