The Westpac-Melbourne Institute Consumer Sentiment Index was released and consumer sentiment has fallen by 3.5% in January, to 97.30 from 100.8 in December.
But really, what does that mean?
What is the Consumer Confidence Index?
The Consumer Confidence Index is a number that represents how people feel about their personal finance, the broader economy and whether they feel it is time to save or spend.
The number is determined from a sample survey of approximately 1,200 Australians.
A Consumer Confidence Index of 100 suggests that of the people surveyed an equal number of people are pessimistic and optimistic about the economy.
A number above 100 indicates there are more optimists about the economy than pessimists, while a figure below 100 – like we have this month – suggests there are less optimists than pessimists.
People’s feelings about the economy seem like an odd thing to quantify.
However, the economy is largely dependent on how people feel.
With the US dollar strengthening against the Australian dollar, a decline in commodities and sluggish growth in China (Australia’s largest trading partner) it is no wonder that the Consumer Sentiment Index is falling.
Uncertainty or confidence in the economy influences whether people save up for a rainy day or if they spend their money.
This determines how much businesses produce and how much money is made, at any one time.
Movements in the Consumer Confidence Index can therefore indicate how the economy may perform in the coming months.
Consumer confidence could reinforce movements in the property market.
I say reinforce rather than determine because property and consumer confidence have a complicated relationship.
Consumer confidence does influence whether people decide to buy property or not.
However, the property market can also influence consumer confidence.
This is because property contributes to something called the wealth effect.
When the price of someone’s house or unit goes up, this can make them feel wealthier and more confident about spending.
This has become particularly apparent since the 1980s, when financial infrastructure evolved and people could more easily borrow money against the equity in their home.
Some academics argue that movements in the value of one’s home has an even greater effect on consumer confidence than income earned from employment. However, there is no clear consensus on this.
But here is where the relationship gets co-dependent: It is generally understood that Australians have a high elasticity of demand for property based on income.
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What this means is, when a person’s wealth goes up – and, as we just established, wealth can go up because of increases in the value of one’s home – their desire to purchase propertyincreases.
This means that increases in property prices can lead to further increases in property prices.
You may know people who have decided to buy investment properties in the last few years because the value of their own home has gone up. The ability to borrow against property enables people to buy more property.
This is my theory as to why the housing booms in Melbourne and Sydney were as large and long as they were.
It took intervention from the Australian Prudential Regulation Authority (APRA) to break this cycle and change the way people feel about the market, which will in turn help prices come down.
The fall in Consumer Confidence this month could reflect slowed growth in the major housing markets across Australia.
A summary of market performance for December is presented below.
Table 1: December Property Market Summary
Stay calm. A smart buyer or seller is conscious of these ebbs and flows in the market.
Learning to read and understand indicators such as consumer confidence can help you recognise where the economy and property market is in its cycle.
For example, if the Consumer Confidence Index is low perhaps it is not the best time to sell and you could wait until the Index climbs above 100. A Consumer Confidence Index above 100 indicates people are keen to spend money.
This may help you achieve a higher sale price for your property.
Below is the Consumer Confidence Index plotted against quarterly capital growth in median house and unit values across Australia.
The data displayed is for the last 10 years.
Graph 1: Consumer Confidence vs Quarterly Capital Growth
Source: Trading Economics and Onthehouse.com.au
The graph shows that growth in consumer confidence and property generally move together.
This just goes to show that there are many relationships with housing and different economic indicators.