Trouble at the top - is Australia’s champagne economy losing its fizz?

Whether it’s the absence of popping French champagne corks – sales of which are dwindling at large alcohol distributors according to Woolworth’s CEO Brad Banducci – or falling sales of luxury cars, something is changing in the mindset of top-end consumers in Australia.

Those at the top end of town are tightening their belts in a hurry and company revenues are suffering.

One of the notable trends this company reporting season has been profit and guidance disappointments related to big ticket items. Data from the Federal Chamber of Automotive Industries indicates the run rate of luxury car sales into the last quarter of 2018 was down 15 per cent. We have seen a drop in the use of credit to buy vehicles as evidenced from the poor results in the novated lease sectors and profits for companies involved in new and used car sales.

The supermarkets have called out difficult conditions, in part due to customers trading down to cheaper alternatives. So what is happening and why has the party ended?

The causes behind the effect

The root cause looks to be related to housing where the top quartile of the property market is falling much faster than aggregate dwellings in the downturn so far, according to data from CoreLogic.

A once-hot topic of conversation among the dinner party set was rocketing house prices but that may have now turned taboo, as despite widespread consensus that apartments would bear the brunt of falls in the property market, it has actually been high-end houses (worth $2.5 million and above) that have suffered the worst falls. This is before any potential changes to negative gearing and capital gains tax, which could be introduced by a future Labor government, impact upon property prices.

The chart below shows the fall in upper quartile house prices in Sydney which are down almost 16 per cent in the 18 months to January 2019. Melbournians aren’t exempt either, with the numbers slightly worse there. This is likely a result of reduced credit availability due to tightening lending standards.

Fall in Sydney house prices – 18 months to January 2019, upper quartile vs median

Economic impact

The big question now is whether this top-end purse tightening is temporary or a sign of the wealth effect – where consumers spend in correlation to how confident they feel about their wealth, even if any losses or gains are only on paper – in reverse?

One positive is that unemployment is still very low at five per cent according to the Australian Bureau of Statistics, and some small improvements are being observed in private and public sector wage growth too.

But whether the weakness in high-end retail sales is confined to the end of 2018 or is something more persistent it is a trend to watch for investors. While this reporting season is just one data point, it is a weak one and guidance so far this year suggests that the downward trend is not persistent yet, but it is also not turning up.

Australia fizzes: French champagne imports vs the weighted average of residential property prices in eight capital cities

Investors who have positioned themselves with exposure to some of these cyclical and discretionary spending-exposed equities won’t be raising any toasts after this reporting season concludes.