Will falling confidence upset the housing party?

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By Leith van Onselen

RP Data’s Tim Lawless released an interesting blog post yesterday looking at some potential implications of falling consumer confidence on Australia’s housing market:

Consumer confidence and housing market conditions are highly correlated. No surprises there… if a consumer is lacking confidence in their household finances they aren’t going to be as prepared to make a high commitment decision such as purchasing a property. If the consumer confidence index continues to trend around the 100 mark or lower we can probably expect the exuberant housing market conditions to taper off, despite the low interest rate environment…

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The early declines in the index were potentially a natural comedown after the post-election improvement, however more recently the lower level of sentiment is probably more attributable to the weaker jobs market…

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…if the current levels of low confidence persist it may be the case the housing transaction numbers start to trend lower as consumers batten down the hatches.

Lawless is spot on about the strong correlation between consumer confidence and the housing market. To illustrate, consider the below charts, which compare both the monthly Westpac-Melbourne Institute Consumer Sentiment Index and the ANZ-Roy Morgan Consumer Confidence Index against various measures of housing market strength.

First, confidence versus house prices:

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As you can see, there is a strong correlation, with consumer confidence appearing to lead house prices.

Second, consumer confidence versus total housing finance commitments (excluding refinancings):

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Again, there appears to be a fairly strong correlation, particularly over recent years.

Third, consumer confidence versus dwelling approvals:

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There looks to be a very strong correlation here, with confidence seemingly leading approvals.

Finally, although not directly related to housing, below are charts of consumer confidence versus retail sales (a proxy for household consumption):

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Again, there is a fairly strong correlation.

Consumer confidence can be volatile and we could just as well see it bounce back over the next few months. However, if it does weaken (or remain at current mediocre levels), then it could be a signal that the housing upswing is on borrowed time.

Definitely something to watch.

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27 Responses to “ “Will falling confidence upset the housing party?”

  1. Ian Lucas says:

    Agree it is something to watch. However this analysis doesn’t factor in the shift in the composition of homebuyers toward investors/speculators and away from people who just want somewhere to live. I wonder how the correlation with consumer confidence holds up for investors/speculators?

  2. Schadenfreude says:

    Correction, how is the Chinese investor confidence holding up…? That’s all that is holding the market up.

    If the Chinese get spooked then its all over rover.

  3. markina says:

    Correction, just got to get rid of the ABS.

  4. Gunnamatta says:

    For mine the real estate ponzi reflects a situation where for many investors (whether rightly or wrongly) housing speculation is the ONLY game they feel they can play. They dont want to play equities, they dont want to play bonds or commodities, and many cant access the money to get in with the better returning funds unless they borrow – and they can borrow most readily for housing speculation.

    I spoke with a mate earlier this week who is a long standing financial advisor/accountancy firm who is retiring having sold his business (he is still working during a handover period). He knows of my firm views against the negative gearing, capital gains and bank lending setup vis housing prices – if I can get him in with a podcast with LvO and CC etc I will when I have time.

    But as he related to me, as a business he sort of achieves a balance between what his clients think is a goer and what he can advise them, and the market in Australia is generally set (those of us here at MB excepted) to think of RE as about the only goer. He has set up SMSF to negatively gear real estate (essentially requires non recourse loans from banks – I was told Westpac is the easiest touch for it) and advised people on how to lever up to buy real estate, despite knowing (and believing as strongly as me) that it is pathetic for the economic future of Australia simply because of his experiences with the funds management world (and he related some classic stories of household funds management names [I wont name them here but I dare say there are zillions of good anecdotes out there] delivering pathetic returns – if not losses, and related the prevailing view of a lot of people in that at least they have something if they speculate in RE (or at least they think they do/will). He described it as the next step up for a lot of people (particularly those with some savings) from going to the races (I know he handles more than a few racing identities). Are they going to invest in a business if they think that retail/confidence is likely to remain shite? or if they think that the ‘Mr Puniverse’ globally exposed sector will be held in the ring against Mike Tyson? (his description).

    His view (like loads of others here) is that the RE market is flat anywhere where the Chinese are not buying. On the Chinese he added an interesting point (or so I thought) in that apart from helping to bid up house prices they have also helped to bid up the prices of going businesses (and he used the example of a tyre business, a blinds business, and a white goods retail business, all bought by Chinese interests mainly to support visa application processes – and where the buyers weren’t particularly interested in the viability of the business per se), meaning that ROI for local investors were being pushed out – further reducing the alternatives to RE. He said that his clients had started fretting a little bit about RE (but not a lot), but did wonder if a further cut in rates (which he tended to agree would be needed for the ‘real’ economy) would trigger the opposite of the intended reaction. His view was that if rates went the other way most of his clients would probably cope fine, but added that at some point a lot of them would want to offload property, or hand it over to their children as a ‘business’ (ie hand over the negative gear) and if their kids were in a position to do this they (his clients) sometimes looked at ‘selling’ in such a way as to try and maximise any possible CGT advantage for their children. Not satisfactory for all he agreed, but works in those families intergenerationally where it works.

    He did add however that he thought it wasn’t sustainable in the long run and that eventually the government would need to ‘taper’ access to CGT and NG.

    • Slambo says:

      Good to have confirmation that many RE purchases are not underpinned by a sound investment case. You do start to worry after a while that you are missing something bleeding obvious.

      The OS buyers are still a bit of a wild card though.

    • Peter Fraser says:

      It’s actually quite profitable to run with the herd as long as your not the last one in.

      If you are going to be contrarian then you need to be getting in as the last herd member gets out.

      The highs and lows are damn hard to pick though as many have found out.

      • Slambo says:

        Some truth to that, but it is still speculation by any other name. Property is generally not that liquid.

      • Peter Fraser says:

        Why does a house of residence need to be liquid, and they are only illiquid in a falling market.

        But if you genuinely feel that the risk is too high, then don’t buy and let someone else take that risk. It’s a clear choice.

      • Andy! says:

        Really, there’s been no significant low to pick since the late 90′s… but yes there is a near-annual set of new highs – with every one representing both huge bullish momentum and increasingly huge (downside) risks for new entrants.

      • Peter Fraser says:

        @ Andy – well I don’t know which market you are looking at, but get the graphs in “Real” prices and then take a look. I think that UE might be able to assist there.

      • Slambo says:


        It has been well documented on this site and elsewhere that the main force behind housing purchases at present is investors in one form or another, so muddying the waters with terms like “house of residence” is just playing games.

        Self-evidently if you purchase a home to dwell in for the long term, short term price fluctuations are of no great consequence. The point is that many can’t afford to buy those homes because the prices keep outrunning their capacity to save. That is a natural outcome of a long series of developments which continuously juice property prices.

        Shelter is first and foremost a basic necessity of life, and while you may be the exception, people in your line of work generally don’t help. Spin all you want. It’s not a game.

      • Andy! says:

        @PF I’ll stick to nominal thanks – “real” *may* apply to everyday goods but using this as a factor to water-down the hyperinflation of land prices is completely misleading and invalid.

      • Schadenfreude says:

        I typed in Peter Fraser in Google image search and this came up.


        Always knew you were a blood sucking leech Peter. :-D

    • rich42 says:

      @Gunnamatta …….”and many cant access the money to get in with the better returning funds unless they borrow”…….

      Can you or anyone else please point me towards some good funds I can look into…High entry or otherwise…Just good consistant returns..I’m in Montgomery Fund and want to hedge with other strategies or even same strategy but across funds.

  5. Explorer says:

    Is it R squared which is the measure of correlation?

    What is the R squared of these series that are said to be correlated?

    Is there a reliable lead by one over the other?

    Or is it just that if they get out of line as they often do in an unpredictable order, they eventually come back together again after some period of time, but not to the same one on any consistent basis.

    In other words is this useless information?

    • flyingfox says:

      While I would be interested in this as well. I wouldn’t be surprised if those series passed a Granger causality test, all factors considered.

  6. churlish says:

    Bubbles are all about confidence, and we are in the euphoria stage. Nevertheless I think at the moment general measures of consumer confidence are not reflective of confidence in housing.
    Australians under about 35 have never seen a bear market in housing. They probably know that stock and commodities go up and down, but they don’t believe that applies to housing. The very muted response of Australian housing prices relative to the screaming headlines of catastrophe at the time of the GFC reinforces their view. Indeed their belief in “bricks and mortar” as the only safe investment means that a general slump in confidence may actually be feeding the housing bubble.

    • Schadenfreude says:

      I agree about confidence being the main driver… Although I would say the <35′s are merely a blip in the market and it is all Chinese driven at this point.

    • Andy! says:

      As an under 35 I dream about a bear market in housing, but don’t expect one here.

      • flyingfox says:

        Why not? And if it doesn’t happen, don’t worry. You still have the option of setting yourself up somewhere else.

      • Andy, Australia faces two potential catastrophes: that land prices fall or that they don’t. Both lead us off the cliff.

        While they stay high, renting is a bargain. Melbourne-wide gross yield is ~3.5% and nett under 2%. A P/E of 50+.

        Choose another place to accumulate: save, invest, study or travel. The very best returns are in further education, then perhaps the sharemarket. Please note, I do not advocate doing nothing.

        Don’t Buy Now!

      • spleenblatt says:

        Aye, Andy. We all face potential catastrophe at different points in our life. In all that we do, lad. But it doesn’t have to take you off that cliff. Close your eyes, son, and tell me what you ‘ear when you think of those jagged cliffs rising high before you each time you contemplate every cross road in your life ? Do you ‘ear the sounds of bones gnashing against the rocks as men and women both scream with their last breath ? Or is it just the crashing of the waves, rising up high and receding, same as it ever was ? Most of the time people just keep putting one foot in front of the other on that same path, day after day, year after year. Aye, it may be an unexpected path. One day you may look up from that path and wonder, where am I ?. The one bargain we’ve been given in this life, boy, is that one that your mother gave you the day you came bawling out of her belly. She didn’t wonder the risk she was takin’ in ‘aving herself torn asunder in bringing you out fresh into the world. It’s all risk, boy. It’s yours to take, and yours to reap. So choose the path that’s right for you, son. Buy now if you want.

      • Dave_Comments says:

        I don’t know if spleenblatt is being sarcastic or is heavily medicated, but thats probably about as cogent as the argument gets for buying Australian RE.
        That alone should sound some alarms.
        Anecdotally, the trend I saw in WA (before I fled) was a less tangible shifting of societal norms. Most of the blokes in their early thirties that I know (mining industry) were short-term cashed up but insecure about their future prospects.
        Still, about a third of those guys bought anyway.
        The other two-thirds seem to be following their less well off mates.
        Their parents morph into their roommates, their homes morph into ‘bases’ and they shift into a semi-nomadic lifestyle.
        (Stints travelling, periods chasing FIFO or other jobs)
        Often both parent and fully grown ‘roommate’ acknowledge the property bubble. I didn’t notice new household creation being the dominant theme in WA when I left.
        Who knows what’ll happen at the end of the day but I reckon Schadenfreude nailed it… the next lot of greater fools will largely hold red passports… but I think they’ll probably be the last.

      • Bellini says:

        Andy, we’re in the same position. As you Had a huge FOMO a couple of years ago, but kept getting outbid on knock downs, which was really demoralising. We stepped back, thinking a pop was inevitable, but it just keeps spinning on.

        We’re planning to buy in the next couple of years regardless (MUCH further out) because we’re over feeling like we’re on hold.

        While I totally believe there is a bubble, and rationally, I know it’s not a great time, it’s all the irrational things that are pushing us towards a purchase. I want to plant a tree in the ground and all that jazz.

        Plus, the kicker is, if a collapse DOES happen, who is to say that economic conditions will be any more favourable to buy? In Spain, borrowing has become so expensive that servicing a small loan is more expensive now than servicing a big loan before the crash. Or who could say that a savings tax is impossible, a la Cyprus? The deposit we’ve been squirreling away ( and earning nothing on ) could become a government sponsored life raft for all the investors currently screwing us over.

        I’m sure I’ll get called a shill, or whatever, but this is where we’re at. I’m tired of waiting and hoping for change. It’s clear now that change is not going to come in a timely nor orderly fashion.