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House prices fall: What impact will it have on the ASX?

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Consumer shares are set to fall as homeowners spend more on their mortgages.

Homeowners are yet to face the full brunt of rising interest rates on their mortgages, which will have an adverse effect on some ASX 200 listed stocks, an industry expert warns.

The warning comes from T. Rowe Price head of Australian equities, Randal Jenneke, who thinks consumer spending will fall and it will impact investors in consumer discretionary stocks.

"There is a lag between rate hikes and the impact to housing, employment and broader economic activity,'' Jenneke told Finder.

As such investors should brace themselves for falling economic spending.

Impacts of the wealth effect

One of the key problems for investors in consumer discretionary stocks is the impacts of the wealth effect.

The wealth effect is a change in spending based on a change in perceived wealth.

So basically, the richer you feel, the more you'll spend.

When it comes to the current housing market, the opposite is in effect. House prices are largely predicted to fall between 15% and 20%, although it greatly varies depending on who you ask.

Regardless of how much the market actually falls, households could spend less just because they feel like they will have less in the future.

"With houses being a large household asset, the wealth effect as well as lower disposable incomes are likely to impact discretionary spending," he said.

AMP Capital's chief economist Dr Shane Oliver largely agrees.

"There is increasing evidence that rate hikes are starting to bite," Oliver said.

"Housing related indicators are all very weak; falling home prices will depress consumer spending via a negative wealth effect; consumer confidence remains depressed; bank card spending data indicates a slowing in discretionary spending", he said.

According to the economist, this is having an impact on retail sales and there are some signs it will impact the labour market.

What should you be investing in instead?

Jenneke thinks investors could avoid these consumer cyclical stocks.

"Our expectation is that the economy continues to slow from here and our portfolio has one of the highest defensive positioning it's had over the past decade," Jenneke said.

He points to some familiar names to investors.

Our top exposures include:

  • ResMed
  • Coles
  • Telstra

"As the economy slows and the cost of capital moves higher, it's fair to say the market has moved on from speculative growth companies funded by excess cheap liquidity, to free cash flow generating, stable businesses," he said.

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