As noted earlier by Houses & Holes, today’s sharp fall in the Westpac-Melbourne Institute Consumer Sentiment Index was an unwelcome wake-up call for an economy that has struggled to gain momentum despite -2.00% of cuts to official interest rates since November 2011.
The Consumer Sentiment index fell for the second consecutive month, slumping by -7.3 points in May to just to 97.6. It was the biggest monthly decline in the index since December 2011, with sentiment now running well below the 100-point threshold seperating optimists from pessimists (see next chart).
As noted earlier today, consumer sentiment has fallen below its November 2011 level, suggesting that the sharp cuts to interest rates have failed to fire-up consumers, which is contrary to the experience of the four prior interest rate-cutting cycles (see below chart).
If sustained, the slump in consumer sentiment is q bearish indicator for the Australian housing market.
The next chart plots the annual change in house prices (adjusted for inflation), as measured by the ABS, against the annual change in the Consumer Sentiment Index on a quarterly basis up to March 2013:
As you can see, there is a high correlation between both series, with consumer sentiment tending to lead house price growth. Accordingly, the sharp fall in sentiment suggests that the house price recovery could soon run out of steam.
The fall in sentiment is also bad news for the housing construction industry, with the Consumer Sentiment Index tending to lead dwelling approvals (see next chart).
Finally, the slump in sentiment suggests that the recent strong growth in the value of housing finance commitments (both investor and owner-occupied) may falter:
In short, the slump in consumer sentiment, if maintained, will likely reverse recent trend in increasing housing activity.
