How important is consumer confidence for our property markets?

How important is consumer confidence for our property markets?

In my opinion there are two key drivers to the housing markets in the short term; interest rates and consumer confidence.

When interest rates go down and are expected to keep going down, home values nearly always increase.

Conversely, when rates go up and are expected to keep rising, property markets stall and prices remain flat or fall.

It’s no coincidence

It is no coincidence that our current upswing in the property market, which commenced in June 2012, followed the commencement of the interest rate easing cycle in May 2012, when the RBA aggressively cut the cash rate by 50 basis points.

According to Dr Asti Mardiasmo National Research Manager PRDnationwide, confidence is the foundation of a healthy market.

In a recent report she asked an important question:

Did our confidence grow this year?

Figure 1. Consumer Sentiment Index Ending November 2014

Dr  Mardiasmo explains that for most of 2013 (except for May 2013) our confidence levels were above the optimistic line and sits at an average of 105.5 points.

In contrast for 2014, particularly after February 2014, depicts our confidence sitting mostly in the pessimist zone, with an average of 97.0.

Thus instead of growing our confidence has declined by approximately 7.6%, suggesting that inadvertently the current economic policies and climate does not sit well with consumers.

What is the impact on the real estate market?

The report explains that answer can be found by comparing dwelling prices and consumer spending.

Figure 2 suggests a reasonable link between rising house prices and consumer spending, where the states with the fastest growth in consumer spending are also the ones with the fastest rising house prices (Westpac Economics, 2014).

Figure 2. Dwelling Prices vs. Consumer Spending: By State

Although improvement of consumer confidence has been slow the index has recovered from its post budget low by 4%.

Coupled with the Reserve Bank set to not raise rates until the September quarter of next year, a steady foreign exchange rate (thus enticing overseas investors into our housing market), and house prices likely to maintain solid upward momentum; the wealth effect is likely to provide an important boost to overall consumer spending growth.

In short for 2015:

Dr  Mardiasmo’s conclusion is that further improvement is expected over the course of next year, bringing us back to above the optimistic confidence line once again.