RP Data: Confidence and house prices

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By Leith van Onselen

Attached is a new report from RP Data which includes some interesting analysis on the strong correlation between the Westpac-Melbourne Institute Consumer Sentiment Index and Australian home values – a topic also covered by MacroBusiness last week.

According to RP Data:

With consumer sentiment easing over the past two months we would anticipate that these results may foreshadow a slowdown in other sectors of the economy, specifically retail spending and housing…

The [below] graph looks at the annual change in capital city home values against the annual change in the six month rolling average reading for consumer sentiment. Ever since the beginning of 2008 there has been a strong correlation between home values and sentiment. With the monthly consumer sentiment reading falling by -11.7% since March 2013, we would expect the lower sentiment reading to have a dampening effect on dwelling value growth. According to the rpdata-Rismark Home Value Index results, combined capital city home values fell by -0.5% in April and are down a further -0.9% over the month of May to-date, suggesting the lower confidence readings may already be at work. With consumers feeling less confident about the overall state of the economy, they are showing less of a propensity to purchase high commitment assets such as houses and this is subsequently showing up in recent declines in home values…

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The consumer sentiment trend also shows a strong correlation with housing market activity. The [below] chart highlights the annual change in sales volumes in Sydney, Melbourne and Brisbane and the annual change in the six month average consumer sentiment reading. Once again you can see that there is a reasonable correlation between the two readings. Based on the recent decline in consumer sentiment it can be expected that sales activity may also slow…

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There has been clear evidence of weaker housing market conditions over the second quarter of 2013. The housing market is highly seasonal and we anticipated a slowing of conditions over the current period however, it is likely that the magnitude of the slowdown and subsequent value falls has been heightened by falling consumer sentiment. Should this continue, it is reasonable to anticipate a less active housing market where value growth is lower than when confidence was much more buoyant.

Full release below.

RP Data Market Activity Update (30 May 2013)

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  1. This report indicates there is $137billion worth of residential property up for sale in Australia.
    If we compare that to the auction sales data it is rare to see any week were nationally sales top a $1 billion.
    I know there are sales outside the auction market but I am starting to think “Houston we have a problem”

    • Don’t forget that each house is on the market for say 5 weeks, even if sold at auction on the day. Many private sales are on the market longer and say 30% of auctions drag on a week or two after the auction date. An average of say 7 weeks wouldn’t surprise.

  2. By the way, I recently travelled in UK, Ireland, Germany, Switzerland and France and life is going on in spite of near recession in UK and a difficult time in Ireland, with France stagnant.

    I am waiting to see whether it looks any different in Spain, Portugal, Italy and maybe Greece.

    Unless you are unemployed it seems life goes on much the same as before.

    UK house prices were recently said to have reached an all time high – maybe unfounded spruiking, but maybe true given low interest rates. So much for the recession.

    On average, if we had to consume 1% less than last year from now on instead of 1% more each year, would it make so much difference to our daily lives?

    Is perpetual real growth per capita really necessary? Is population growth really making existing lives better? And in any event it’s just not perpetually sustainable!

    • The Patrician

      Well said Explorer.

      When the doves cry for more debt-fuelled consumption and inflation, who benefits?

      • Yes, very well said. If you remain employed, life goes on. It’s also interesting how many studies show that people were generally happier in the decades before the boom in debt-based consumption. Says alot about what is really important – one’s health and their relationships.

      • Life in a depression is way better for the fully employed. Prices fall, people offer to do manual jobs for low wages.

        It’s just wonderful as explorer said “Unless you are unemployed”

        Let’s not look at crime rates, drug trafficking or prostitution though.

      • The Patrician

        Interest rate cuts and population growth reduce the crime rate and mortgage brokers are actually social workers.

        The debt peddlers are getting desperate.

  3. Take a lesson from Ray Dalio. Correlations are misleading. You need to look at the drivers. Does Consumer Sentiment really drive House Prices, or is it the other way around?

      • Totally, very simplistic analysis.

        If they correlation was multi-factorial with interest rates and real estate incentives I might give this a modicum of credence.

  4. FactOrFiction

    Yet another proof that contrarian approach works in investment 🙂

    “Buy” when everybody perceives doom and gloom and “sell” when the hordes are the most enthusiastic…