Wednesday’s solid rise in the Westpac-Melbourne Institute Consumer Sentiment Index was a welcome sign for the housing market, which has struggled to gain momentum despite -1.35% of cuts to mortgage rates since November 2011.
The Consumer Sentiment index jumped 7.7 points to 108.3, which was the highest reading since December 2010 (see next chart).
Consumer sentiment has also finally climbed above its November 2011 level, suggesting that the sharp cuts to interest rates are finally starting to bite, albeit not as hard as prior rate-cutting cycles (see next chart).
The improvement in consumer sentiment is a bullish indicator for Australian house prices. The next chart plots the annual change in house prices (as measured by the ABS) against the annual change in the Consumer Sentiment Index on a quarterly basis up to December 2012:
As you can see, there is a high correlation between both series, with consumer sentiment tending to lead house price growth.
The lift in sentiment is also good news for the housing construction industry, with the Consumer Sentiment Index tending to lead dwelling approvals (see next chart).