Westpac sees 5% bounce in mortgages

Westpac is out with its September Red book of consumer sentiment and is turning bullish on the effect of rate cuts:

The Oct Westpac–Melbourne Institute Consumer Survey presented another disappointing headline with some notable developments in the detail.

While sentiment improved and the overall mood is only a touch below ‘neutral’ it is a disappointing result given the backdrop. Despite what for many would have been a surprise Oct rate cut by the RBA and a more positive backdrop offshore, sentiment registered a tepid 1% rise to a level that implies pessimists still outnumber optimists. More to the point, the cumulative impact from the 150bps in official rate cuts since this time last year has done little to lift the sombre consumer mood with a weak up-trend at best.

There are some positives in the Oct detail. The components that are more closely linked to spending decisions showed a somewhat better gain.

More promisingly, while rate cuts might have done little to sentiment they have (finally) sparked a big shift in attitudes towards the housing market.

Indeed, the jump in views on ‘time to buy a dwelling’ is such that, if sustained, it should be enough to overcome intense job loss fears and drive a modest recovery in housing. Our modelling suggests it is enough to drive a 5% rise in housing finance approvals (a proxy for market activity).

A gradual improvement in unemployment expectations could lift this to a 10%+ recovery in activity. This looks far less assured though. Not only is the official labour market now confirming a weakening, but the detail of both the official jobs data and of consumers’ unemployment expectations suggests the shift is coming from what was the ‘cornerstone’ of Australia’s labour market resilience: the resource sector.

The weakness is a long way from a ‘mining bust’ and housing activity now looks better placed to provide some offset but we suspect firmer consumer spending will be required. As such, the tepid sentiment response to rate cuts to date argues for further easing in the months ahead.

The edition also had a special on house price indicators:

― The Oct survey included an update of the Westpac–Melbourne Institute Consumer House Price Expectations Index. Not surprisingly given the interest rate easing and further evidence of stabilisation in house prices nationally, the Index posted a solid gain, rising 9.1pts from 25.2 in Jul to 34.4 in Oct.
― However, whether the result is good or a little disappointing is a little unclear. On the ‘glass half full’ side, an outright majority (50.3%) of consumers now expect price gains with the overall reading the most positive since Apr 2011 and on a par with readings in Jul 2009 and Nov 2007.
― On the ‘glass half empty side’ two of these similar prior readings – 2007 and 2011 – were in ‘cooling’ markets. The latest rise is also arguably a little under-done given the degree of policy easing. We do not have a definitive benchmark here as the last easing cycle, in 2008-09, was much more aggressive and coincided with a doubling in fi rst home buyer incentives. Even still, the latest gain is much more muted than the surge in price expectations in 2008-09 and is less pronounced than the latest rise in the ‘time to buy a dwelling’ index (which is rising at a similar rate to 2008-09, see p13). ― We suspect the truth is somewhere in between.

― Compared to Jul, the split shows the main shift was a 5.6pt decline in those expecting price falls mostly into those expecting a rise of 0-10% (+3.7pts) or ‘no change’ (+2pts).
― The contrast with the 2008-09 surge is even starker at the state level. Whereas that previous surge was strong and broad-based, the 2011-12 gain has been milder and much more uneven. Oct saw a big improvement in Vic (+31pts) from a very weak Jul read, and a solid gain in NSW (+12pts) but price expectations weakened in Qld (–14pts) and WA (–12pts). The mining states now mark the range from least optimistic (Qld) to most (WA).
― There were also some sharper contrasts across demographic ‘groups’ with a strong rise amongst those renting (+28pts) but a notable mark down to price expectations amongst those with a mortgage (–4.6pts). The agegroup breakdown showed a more muted rise amongst the key groups driving fi rst home buyer demand compared to those driving ‘upgrader’ and investor activity although first home buyers remain more optimistic on prices overall.
― While the detail may be mixed, the consensus view still favours price gains in every group. Other surveys show businesses and property professionals also see price gains ahead.

What can I say? I see big structural inhibitors to anything other than a modest pick-up in house prices. Loan growth is capped by local funding requirements. The terms of trade and mining investment unwind has only just begun. Fiscal austerity is here for good. The RBA will not get housing construction going unless prices are rising but it cannot have them growing more than income, which is going to fall.

Interesting times!