Interest rate magic

Consumer Confidence for September is out and shows a jump of 8.1%.

Bill Evans puts this down to:

This is a surprisingly strong result. We think it emphasises just how important interest rates are to households. Recall that since early May the Reserve Bank has been threatening to raise interest rates. As recently as the August Board meeting it was widely reported that the Board discussed a further rate increase. However, as a result of the escalating turmoil in the global economy and evidence of a slowdown in the domestic economy the Bank is no longer threatening to raise interest rates. Concrete evidence of the improved outlook for interest rates came shortly after the August survey when the major banks actually lowered their fixed rate mortgage rates. While possibly coming as a surprise this action would have comforted anxious households.

I see nothing to gainsay this analysis. And Evans has more proof:

There was further evidence that prospects for steady interest rates have boosted confidence. The index tracking responses on “whether now is a good time to buy a dwelling” jumped by 15.1%. It is now at its highest level for two years and is certainly sending an encouraging signal to an otherwise subdued housing market. There is a risk that this signal may be overstating the prospects for the housing market. With households still being particularly concerned about their own financial position over the next 12 months there is a risk that, while seeing value, they will not be prepared to act on this.

There is some support for our cautious view on housing in households’ attitudes towards the wisest place for savings. This question did not send quite the same positive message to the housing market with a modest increase (14.6% to 16.8%) in the proportion of respondents who favoured real estate as a wise place for savings. That was despite a further reduction in those favouring equities from 8.4% to 7%. In both cases household favourability continues to run at historically low levels.There was also a big shift away from favouring paying down debt (down from 23.9% to 18.7%) towards bank deposits (up from32% to 37.8%). That is the highest proportion supporting bank deposits since December 1975.

So, how do we read these results? There has been a steady bottoming in most credit aggregates in the past few months and the bounce in housing and general sentiment confirms it as a bottom for now.

But, let’s not forget the reason rates have stopped rising. Mostly, according to the RBA, it’s global economic weakness. That is the swing factor. If it get’s worse, as is my base case, then this will be a temporary reprieve in sentiment as job security surges as a worry. If it doesn’t deteriorate further, the bounce makes it unlikely we’ll see rate cuts, but we’ll probably still see some unleashing of pent up demand in housing and consumption, until more rate rises.

It seems Australians very much prefer a touch of global chaos to adjusting to the mining boom, thanks very much. Full report below:


David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. Has any data miner or avid chartist out there ever graphed this or any other consumer sentiment index agaist anything “real” to understand how relevant it amy be?

  2. Good question. I see similar sized movements up and down over the years plotted on the chart that don’t correspond to anything dramatic occuring, that I can recall at least.

  3. “We think it emphasises just how important interest rates are to households.”

    or put another way: it emphasises how highly leveraged households are

    • Indeed GB,

      Call me biased but my first thought was that if households get this nervous about a further increase then they really must be on the edge of the precipice. No room left for households to take another hit it seems.

      It seems global unrest may have kicked the can down the dirtroad on this one…

      • It was mentioned yesterday that a large percentage of households repay more then the minimum amount on their mortgage though. This would mean that maybe households aren’t as close to the wire as people think.

        • Then why would consumer confidence rebound like this as soon as interest rate rises seem unlikely at the moment? Wouldn’t this only happen when people are struggling with their repayments?

          I’m not dismissing it but I wouldn’t know of another reason for the rebound/bounce.

  4. “With interest rates expected to fall and shares not offering the return required to justify the risks involved, expect to see investors flock to the perceived security of property.”

    Christopher Joye, Sept 13, 2011.

    Key word being “perceived”. Do the masses still maintain such perception?

    • I think that perception is still there, although it’s changing slowly. Don’t let current coverage of price falls or the pathetic performance of The Block fool you – the Aussie real estate cult is alive and well.

      If the RBA starts cutting rates the punters will put the additional cash into the housing market.

  5. ‘It seems Australians very much prefer a touch of global chaos to adjusting to the mining boom thanks very much’

    Australians would very much prefer the resumption of housing ponzi asset price inflation – most households don’t concern themselves with the mining boom at all.

        • This is a variation of Mining PR Bot talking point #23:

          Its not the mining boom, its the collapsing housing ponzi.

          I think it was down yesterday for a software upgrade. Gina has spent another mil ironing out a few bugs. Once its fully tested at MB — and Mitch is completely happy with it — it will be deployed globally, hitting every economics blog and forum on the intertubes.

          Bwahaha! Bwahaha! BWAHAHA! goes Mitch Hooke as he strokes his cat.

        • Oh, and FWIW, most Australians aren’t concerned with global chaos either. Australians are concerned with interest rates, house prices, petrol prices, who’s winning at football and keeping the queue-jumpers out (pretty much in that order)

          If global chaos means lower interest rates and falling oil prices, then that’s a good thing. The mining boom was good when we were told it “saved Australia from the GFC” and made overseas holidays cheaper. Now we hear from anti-mining pinko tree-huggers (aka the Australia Institute) that the mining boom is pushing up interest rates and depressing house prices. Ouch! Nothing hurts Aussie confidence more, which trumps all the good things from the mining boom tenfold.

          • “…Australians are concerned with interest rates, house prices, petrol prices…”

            Lorax, second time today we have agreed, glad to see you moving the right side – welcome.

            But your auto-reflex commenting nature still lurks:

            ‘… anti-mining pinko tree-huggers…’

            You have described yourself thus previously (minus the pinko, suspect it was there), ‘rusted on’ I do recall. Bit by bit, chipping aware I will release you from your torment.

            As I said, Welcome!

          • I’m a watermelon MineBot, a watermelon! All greenies are!

            (lets see its algorithms figure that out)

            As I’ve said before, I’m more of an economic liberal, social liberal and rabid greenie. This is why Turnbull appeals — that, and the fact he appears to have a brain and a conscience — more than I can say for Abbott.

          • Third time today. Malcolm for me as well.

            And I do like Green and Pink, on the very young, yet to mature.

  6. The quick and substantial rise in “Now is a good time to buy a property” proves how deeply entrenched the idea that any or all savings should go into housing and leave the foreigners to develop the mines and industries.
    But that’s OK we can, later, just confiscate their property in a fit of jealous umbrage. After all ‘it’s ours’

    We’re still over-consuming which proves that interest rates are too low. Our intention is to over-consume even more if interest rates fall.

    • Agreed. How’s Bill Evans’ form? Not much has changed IMO. He says the economy is a basket case and immediate cuts are needed. Rates are unchanged, his index goes ballistic and he somehow draws the conclusion that people perceive that the shackles have been removed, rates are headed down and all is well again!

      The new Westpac paradigm – confidence down, rates down, confidence up………..rates down?

  7. Ok, first thing to say about this is, the data is noisy and an 8% move probably isn’t statistically significant.

    Second thing, I’ll buy that the surge in confidence could be because interest rates are now steady and may fall later in the year — nothing cheers up Australians like a cheaper home loan — but is anyone buying this?

    The second contributing factor is likely to be the strong recovery in economic growth in the June quarter which was reported tohave been 1.2% following the contraction of 0.9% in the March quarter. That development gained particularly wide media coverage and would have boosted households’ spirits.

    Ya reckon?! I think most Australians either didn’t notice the GDP number (which are only a week old!) or thought “Bullsh*t!” as soon as they saw them. Ok, maybe Chris Joye, Gittins! and a few thousand miners in the Pilbara believed the GDP numbers, but no-one else did.

    • Agreed on the GDP number. But you give the average joe way too much credit on the interest rate promise. They’ve been taken hook, line and sinker on debt for 20 years and you reckon it might change now?

    • +1 – this is a pretty minor move relative to standard deviation of this dataset. It had to move north of 100 to counter-act the previous few months. It didn’t, so the sharply downward trend is still in effect. For me, 105 would be the magic number. If it gets up to that in the next couple of months, then confidence is back up. Likewise, 90 on the way down.