Australian consumers continued to act cautiously throughout most of 2012, continuing to repay their debt and save at a high level, this week we look at whether or not these trends are likely to continue in 2013 and what it potentially means for the housing and property investment market.
Throughout 2012 consumers continued to take a conservative approach to debt, particularly housing debt, they have shown a preference for paying down debt and saving rather than spending.
Will this conservatism towards spending persist, or are consumers about to start opening their wallets once again in 2013?
What happens to consumer sentiment throughout the year is likely to heavily influence the performance of the housing market and the broader economy throughout 2013.
Capital city home values fell by -0.4% in 2012, highlighting a weakness in demand however, transaction volumes to October 2012 were 21% higher than they were a year earlier, indicating that consumers are once again starting to spend on housing.
The recent improvement in sales activity has occurred off a very low base throughout 2011.
Over the second half of the year home values also started to improve, after reaching a low point in May 2012, capital city home values rose by 1.8% by the end of December.
Elsewhere across the economy, consumer sentiment has typically pointed to higher levels of pessimism than optimism over the past few years.
Westpac and the Melbourne Institute’s measure of consumer sentiment has averaged 98.3 points on a month-to month basis over the 12 months to January 2012, indicating that consumers have generally been more pessimistic than optimistic.
However, consumer sentiment has been at or above 100.0 points for three consecutive months to January 2012 and the last time sentiment was consistently above that level was over the 3 months to June 2011.
As the first graph highlights, changes in consumer sentiment and changes in capital city home values have quite a strong correlation. Given this, a sustainable recovery in consumer sentiment is likely to provide quite a positive outcome for the housing market.
It isn’t just home value increases which tend to move in line with consumer sentiment, so too does transaction activity. Unquestionably, the number of transactions is much more important than whether or not home values are rising for most industry participants.
As the second chart shows, a recovery in consumer sentiment will typically foreshadow a recovery in sales transactions.
Given the fact that there is a correlation between both home sales and value increases with consumer sentiment, a sustained improvement in consumer sentiment is going to be a necessary part of any consistent improvement in the performance of the housing market.
Although an improvement in consumer sentiment will be an important component to any sustainable recovery in the housing market, respondents to the monthly consumer sentiment survey already feel that now is a good time to buy a home.
The time to buy a dwelling index was recorded at 140.0 points in January indicates most respondents feel it is a good time to buy a home.
It is no surprise so many respondents feel it is a good time to buy, with standard variable mortgage rates having fallen by 135 basis points since October 2011 and home values having fallen over successive years in 2011 and 2012.
The cost of servicing a mortgage has become significantly cheaper and the price that purchasers will have to pay to secure a home has generally fallen as well.
Although consumers feel it is a good time to buy a home, to-date relatively few of these buyers have actually entered the market.
So why aren’t consumers rushing back to the market now as they did in 2009 when interest rates were this low?
We believe it has to do with a changed consumer mindset towards debt.
Households have now saved around 10% of their income for the past five years following ongoing falls in household savings since the late 1970’s.
The changing attitude toward debt is also reflected in the fact that private sector housing credit is growing at record low levels. This indicates that mortgagees are paying off their mortgages quicker as well as fewer new mortgagees taking out loans, this is supported by housing finance data which remains at low levels.
Another contributing factor is housing affordability.
Although values have fallen over the past few years, the nationwide median home price is $430,000.
Psychologically, that is a large amount of money to commit to repay over 25 to 30 years and for many it is the largest investment decision they’ll ever make. If consumers are to make this decision, they want to be sure they will be in a position to repay the debt.
That includes being secure in their job and having the capability for their wage to increase over coming years and being able to cover the cost if they do unfortunately lose their job at some point in the future.
Overall, consumer sentiment is going to play a vital role in the performance of the national housing market throughout 2013. If the recent optimism can be maintained then home values and sales activity are likely to pick up throughout the year, if sentiment weakens, it is likely to delay a sustainable improvement in the housing market.
The magnitude of any housing market improvement, should it come to fruition, is likely to be less significant as it has been in the past as households continue to act conservatively, repaying debt and more carefully managing their finances than they have in the recent past.