Westpac is out with a new expectations note, this time about interest rates:
The Feb, Jun and Aug Westpac-Melbourne Institute Consumer surveys include an extra question about expectations for mortgage rates over the next 12 months. The Aug survey showed more consumers expect rates to rise or be unchanged than to fall.
The results show 41% of consumers expect rates to be higher by Aug 2014. Although that is the same as in Feb, the Aug survey found a higher proportion expecting rates to stay on hold (36% vs 30% in Feb). There was also a significant shift in responses following the RBA’s 25bp rate cut: 44% of those surveyed after the move expected rates to be higher, 38% expected no change, and only 19% expected a further decline (vs 33% of those surveyed prior to the move). The clear message is that most consumers do not expect mortgage rates to come down any further over the next 12mths.
We now have 4yrs of surveyed mortgage rate expectations spanning a cycle in which the average standard variable rate has risen from 6.65% to 7.8%, and back down to 5.95%. While its debatable as to how ‘typical’ that cycle may have been, a few tentative observations can be drawn: 1) consumers seem more inclined to expect rate rises than falls; 2) expectations can be slow to react to cyclical changes; and 3) there is rarely a strong consensus on the direction of rates.
That lack of consensus has a different meaning right now given the current low level of mortgage rates. At 5.95%, rates are around 150bps below their long-run average. While consumers as a whole may not expect further rate cuts, they clearly expect a continuation of the low interest rate environment.
Consumers in NSW are more convinced rates will rise with an outright majority, albeit a slight one (51%), expecting higher rates in a year. Renters are also more hawkish while home owners tend to favour no change over rises, especially those with the most on the line, consumers with a mortgage.
The age-group breakdown shows a slightly more hawkish rate view amongst those in key first home buyer age groups. Those in age groups that drive upgrader and investor activity were more evenly split between ‘rates higher’ and ‘no change’. There was no outright consensus on the direction of rates across any group though.
This might be read in three different ways. It’s irrelevant. It means punters don’t yet understand the headwinds facing the economy and hence poses a downside risk to sentiment, or they are not yet aware that rates will remain low for an unusually long period and as this reality dawns there could be more demand to unleash for housing speculation.
The bottom-line is, the only reason rates will rise in even in the medium term is overheating in property.
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.
