Goldman Sachs expects Australian consumption to slow amid house-price wealth shrinking and stagnant real incomes

Overview

Goldman Sachs in this Australia and New Zealand economic research note states that the slowdown in Australian household consumption growth is a key domestic macro risk to monitor going forward. The report argues that falling house prices creating a negative wealth effect, stalled real income growth, a slowdown in labor income, and inflation pressure will jointly weigh on 2026 consumption performance. Although Q2 2026 consumption appears more resilient than Goldman Sachs previously expected, the research team expects wealth and income pressures to gradually pass through to consumers and to trim the 2027 year-end GDP forecast slightly to 2.5% year-over-year.

Core views

The core view is that the consumption slowdown is mainly driven by a decline in housing wealth, followed by weaker growth in real income. Goldman Sachs expects house prices to fall 5% year-over-year by Q1 2027, contributing about 90 bps of drag to 2026 year-end consumption growth through the wealth channel. On the income side, the report expects real disposable income to grow only 0.5% year-over-year by end-2026, with per-capita real disposable income declining 1.2% year-over-year. The consumption slowdown is not expected to be uniform but to be more concentrated in discretionary spending and in Sydney and Melbourne, where housing markets are weaker. The report also argues that currently weak consumer confidence is more a symptom of worsening macro conditions than an independent driver of consumption outlook.

Analysis framework

The report combines macro forecasts, the housing wealth effect model, long-run relationships between real income and consumption, category-level consumption elasticity estimates, city-level house-price differences, and consumer confidence reversion analysis to assess the magnitude, structure, and policy implications of the Australian household consumption slowdown. The focus is not on any single company or security, but on the macro transmission between housing, income, consumption, and the RBA policy path.

Methodology notes

• Macro consumption modelHousing wealth effect model

  Elasticity of consumption to changes in housing wealth

  The report estimates that each 1% decline in housing wealth reduces the long-run level of consumption by 0.18%, with about 0.11% of the adjustment occurring within two quarters.

• Macro income modelLong-run relationship between real income and consumption

  Effect of real disposable income on consumption

  The report estimates long-run elasticity of real disposable income to consumption at about 0.53, but expects households to smooth consumption by lowering the savings rate, so the drag from weaker income growth on consumption is relatively moderate.

• Statistical regressionConsumer confidence incremental explanatory power test

  Impact of consumer confidence after controlling for income and wealth

  The report uses quarterly data from Q1 1991 to Q4 2025 for OLS regressions and applies Newey-West HAC standard errors, finding that after controlling for real income, housing wealth, and COVID shocks, consumer confidence has limited independent explanatory power for total consumption.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Australian residential real estate

  Core macro transmission variable

  Strengths

  Household balance sheets start from a relatively strong position, and mortgage prepayments are above average, providing a buffer for consumption smoothing.

  Weaknesses

  House prices are expected to fall 5% year-over-year, and the negative wealth effect is the largest drag on the consumption slowdown.

  Comparison

  House prices in Sydney and Melbourne have been weakening for several consecutive months, and consumption adjustments are expected to be more pronounced.

  Risks

  If house-price expectations become self-reinforcing, declines could become larger than baseline and create stronger consumption headwinds in 2027.

• Australian household consumption

  Primary explained variable

  Strengths

  Q2 consumption appears slightly stronger than previously expected, and households may still smooth spending by lowering savings rates.

  Weaknesses

  Wealth erosion, weak real income, and slower population growth together weigh on consumption growth.

  Comparison

  Discretionary categories are expected to underperform necessity categories, with larger adjustments likely in auto sales and dining out.

  Risks

  If the labor market is weaker than expected and real income declines further, consumption may fall below baseline forecasts.

• RBA policy rate

  Key variable for macro conditions and subsequent recovery

  Strengths

  Tightening policy helps cool demand and normalizes inflation pressure.

  Weaknesses

  Current high rates pressure housing, incomes, and consumption.

  Comparison

  Goldman Sachs' 2026 year-end consumption forecast is 60 bps below the RBA, but becomes more constructive from 2027 onward because its assumed cash-rate path is below the path implied by the RBA's May forecast.

  Risks

  If inflation undershoots expectations, delayed easing will add further downward pressure on housing and consumption.

Key data

• Forecast for consumer spending growth at end-20261.3% yoyA 120-bps slowdown versus the prior path.
• Forecast for consumer spending growth at end-20272.4% yoyPreviously forecast at 2.7% yoy.
• Forecast for 2027 year-end GDP growth2.5% yoyPreviously forecast at 2.7% yoy.
• House price forecastDown 5% yoy by Q1 2027Affected by higher interest rates and housing tax changes.
• Impact of house price declines on consumptionAbout 90 bps dragExpected to drag 2026 year-end consumption growth.
• Real disposable income forecastGrowth of 0.5% yoy by end-2026Oil-price-driven inflation shocks and slower labor income growth are creating pressure.
• Per-capita real disposable income forecastDown 1.2% yoy by end-2026The report expects households to smooth consumption by reducing the savings rate slightly.
• Unemployment rate forecastPeak at 4.7% in Q1 2027Tight monetary policy is expected to slow labor income growth.
• 2026 Q2 consumption nowcast0.3% momA slowdown of 20 bps versus the prior period, but little change in sequential momentum after removing Q1 energy subsidy distortions.

Impact & implications

The policy implication of the report is that weak consumption and housing are not isolated risks, but the intended result of the RBA tightening cycle lowering demand and helping inflation return to the 2%-3% target range. Goldman Sachs sees its weaker near-term consumption forecast as still consistent with a baseline scenario of one additional RBA rate hike in August, but judges the outcome to be very close; by Q1 2027, if the RBA sees inflation sustainably returning to the target range, cuts are expected to begin in support of the housing market, labor income, and consumption recovery in the second half of 2027.

Risks

• Upside risk: Households may draw on savings more actively than baseline assumptions and smooth spending, making consumption more resilient.
• Downside risk: House-price expectations may become self-reinforcing, leading to a larger-than-expected decline in house prices.
• Downside risk: If the labor market is weaker than expected, real income could fall more than in the baseline scenario.
• Policy risk: If the RBA delays rate cuts due to inflation pressure, housing, labor income, and consumption recovery may be postponed.

What to watch

• Australian house prices, especially subsequent declines in Sydney and Melbourne.
• Household consumption month-on-month momentum from 2026 Q2 onward.
• Changes in real disposable income, per-capita real income, and household savings rates.
• Whether unemployment approaches or exceeds the Goldman Sachs forecast peak of 4.7% in Q1 2027.
• Whether the RBA raises rates again in August and whether conditions are in place to begin cutting from early 2027.
• Discretionary categories, including the magnitude of slowdown in auto sales and dining out.