A sustained fall in consumer sentiment is likely to impact on our property investment markets

Consumer sentiment has recorded a significant uplift since late 2011, however if recent weakness in the measure continues we are likely to see repercussions for the housing market despite the low interest rate environment.

Westpac and the Melbourne Institute released the May 2013 Consumer Sentiment Index results last week which showed a sharp decline in sentiment over the month.

The Consumer Sentiment Index fell by -7.0% over the month following a -5.1% fall in April.

The Index now sits at 97.6 points which is its lowest reading since August 2012 and indicative of higher levels of pessimism than optimism.

The Consumer Sentiment Index is inherently a volatile monthly measure; sentiment tends to react to the latest news and worldwide economic events. It was widely reported that the Federal Budget announcement was largely responsible for the weakness this month.

Nevertheless, looking at the six month average sentiment figure, it sits at 103.7 points, only slightly more optimistic than pessimistic.

This would tend to suggest that consumer confidence remains fragile and is subsequently likely to be reflected in consumer spending habits.

http://image.e.rpdata.com/lib/fe591570776d03757d17/m/4/2013_05_31_consumer+sentiment.jpg

With consumer sentiment easing over the past two months we would anticipate that these results may foreshadow a slowdown in other sectors of the economy, specifically retail spending and housing. The nationwide median sale price of a home over the three months to April 2013 was $405,000.

For most consumers, the purchase of their home is the single largest asset purchase they will ever make and each subsequent home purchase for owner occupation purposes tends to be larger than the previous one as families and salaries grow.

You would therefore assume that to make a home purchase the consumer needs to be confident about the economy, confident that they can service a high level of debt and confident that they are going to stay in employment and be able to increase their income over time. Should these factors not be in place, potential buyers will be less likely to buy a home.

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The second graph looks at the annual change in capital city home values against the annual change in the six month rolling average reading for consumer sentiment.

Ever since the beginning of 2008 there has been a strong correlation between home values and sentiment. With the monthly consumer sentiment reading falling by -11.7% since March 2013, we would expect the lower sentiment reading to have a dampening effect on dwelling value growth.

According to the rpdata-Rismark Home Value Index results, combined capital city home values fell by -0.5% in April and are down a further -0.9% over the month of May to-date, suggesting the lower confidence readings may already be at work.

With consumers feeling less confident about the overall state of the economy, they are showing less of a propensity to purchase high commitment assets such as houses and this is subsequently showing up in recent declines in home values.

http://image.e.rpdata.com/lib/fe591570776d03757d17/m/4/2013_05_31_consumer+sentiment_v_values.jpg

Interestingly, capital city values have been falling despite the fact that clearance rates have been strong throughout 2013 and are currently at their highest levels in three years. Of course, auctions represent just a small proportion of all sales and are more reflective of the premium housing market.

This sector of the market is likely responding to the fact that equities markets have recently rallied, premium home values have fallen by a much greater amount than other sectors of the market and mortgage rates are at very low levels on an historic basis.

The consumer sentiment trend also shows a strong correlation with housing market activity.

The third chart highlights the annual change in sales volumes in the Sydney, Melbourne and Brisbane property markets and the annual change in the six month average consumer sentiment reading.

Once again you can see that there is a reasonable correlation between the two readings. Based on the recent decline in consumer sentiment it can be expected that sales activity may also slow.

http://image.e.rpdata.com/lib/fe591570776d03757d17/m/4/2013_05_31_consumer+sentiment_v_values.jpg

Of course no one truly knows the future direction of the housing market but if recent trends are anything to go by it will be heavily influenced by consumer sentiment.

The two months of weakness in data could easily be reversed over the coming months however; the volatility in consumer sentiment and global economic uncertainty is making consumers much more cautious.

This fact is highlighted by additional data which shows households are saving around 10% of their income and have done so consistently for the past five years.

Also reflective of the high level of consumer caution is the credit and debit card statistics published by the Reserve Bank (RBA). The average outstanding balance on credit cards over the 12 months to March 2013 has fallen by an almost record -2.4% over the year.

The total number of credit card transactions has increased by 1.7% over the year compared to average annual growth of 5.8% over the past decade.

Conversely, the number of debit card accounts increased by 6.7% over the year compared to the decade average annual growth of 4.2%. These figures highlight that consumers are showing a preference for using their own money rather than borrowed money.

Again, given that current mindset, you would anticipate that there is going to be a lower propensity for the majority of consumers to be borrowing large sums of money to either enter into the housing market or to upgrade from their current home.

There has been clear evidence of weaker housing market conditions over the second quarter of 2013.

The housing market is highly seasonal and we anticipated a slowing of conditions over the current period however, it is likely that the magnitude of the slowdown and subsequent value falls has been heightened by falling consumer sentiment.

Should this continue, it is reasonable to anticipate a less active housing market where value growth is lower than when confidence was much more buoyant.

[post_ender]



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Cameron Kusher

About

Cameron Kusher is Corelogic RP Data’s senior research analyst. Cameron has a thorough understanding of the fundamentals such as demographics, trends & economics. Visit www.corelogic.com.au


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