Higher interest rates are no longer just about slowing the housing market. They’re now starting to flow through into the economy and impact business conditions. This week I looked at a few leading retailers and lenders to find clues.
JB Hi-Fi warned the market that spending started slowing down after the budget. Template & Webster has said similar things. Both these businesses benefit from people moving homes, either renters or buyers.
Lower house prices obviously impact consumer sentiment and the wealth effect — when prices stop rising, consumers who own homes of investment properties start to worry about their wealth and pullback on spending.
But housing turnaround is also being impacted from not just rates, but a very messy budget that has thrown uncertainty into the market.
When the housing market slows down, turnover also slows down. Less movement is bad for business activity. It impacts retail, real estate and lending. The big four banks have all come out in recent weeks and said their loan applications to investors are down around 15-30%.
I expect to see this trend continue, but also show up in lower owner occupied activity as sellers hold onto their homes going into the spring season. A few bad loans have caused a massive concern for Judo Bank (a business lender) in recent months. This is before more widespread business losses start to flow through.
Business cycles are normal. This is nothing new. My focus is on what happens next. The RBA has cautioned rate rises are possible. I see it very unlikely. High rates are already choking the economy. Government sentiment is negative, further adding fuel to fire.
In a weird way, the government has done some of the RBA’s job by causing uncertainty, confusion and denting investor sentiment.
This is a generalisation, not every sector is doing it tough. Trades, infrastruvture, health and the data centre industry are all growing very strong. Mining and energy will continue to see strong investment flows.
For housing, its important to remember that cycles are normal. They don’t last forever, income is important and new supply will continue to remain constrained even further if prices remain soft, providing a natural floor.