Consumer sentiment spanked on bubble fears

Westpac’s Consumer Sentiment Index sank by 4.6% in September from 98.5 in August.From Bill Evans:

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This is a surprising and disappointing result. Following the 6.8% plunge in the Index in the aftermath of the Commonwealth Budget in May the Index had stabilised and was gaining ground. From June to August the Index had lifted by 5.9% to find it only 1.3% below the pre-Budget level. The Index is now 5.8% below the pre- Budget level and only 1.1% above the post-Budget print. In effect most of the steady recovery we had seen in the Index over the last three months has been eroded.

Every quarter we survey respondents’ recall of major news items.

In June, following the release of the Commonwealth Budget, 73.8% of respondents recalled news items about ‘Budget and taxation’. That was a significantly higher percentage than for any other categories of news items, the next highest being ‘economic conditions’ (42.7%); ‘employment’ (22.2%); and ‘interest rates’ (16%).

For September ‘Budget and taxation’ continues to dominate. The significant topics recalled in September are: ‘Budget and taxation’ (62.7%); ‘economic conditions’ (53%); ‘employment’ (29.5%); and ‘interest rates’ (18.1%).

We also survey whether respondents assess the news heard as being favourable or unfavourable. All four topics were assessed as unfavourable although there were some marginal improvements in ‘Budget and taxation’ and ‘employment’. There was a marginal deterioration in ‘economic conditions’ and assessments of news on ‘interest rates’ were steady.

The proportion of respondents recalling ‘Budget and taxation’ issues is the second highest since the survey was introduced in mid-70s. The highest was the June reading and this compares with other high readings of 56.3% in June 2000 (associated with the introduction of the GST) and 55.2% in June 2010 (associated with the announcement of the mining tax). On both those occasions ‘news recall’ had fallen away significantly by the following quarter, to 26.7% and 30.5% respectively.

A reasonable summary from the ‘news heard’ / ‘news recall’ series is that households are a little more comfortable with the Budget but it continues to dominate their thinking and they remain on edge. Furthermore, they are still quite concerned about the domestic economy and the labour market with these concerns having deteriorated further since June.

Four of the five components of the Index fell in September.

One component, the sub-index tracking expectations for ‘family finances over the next 12 months’ was steady. The sub-index tracking assessments of ‘family finances compared to a year ago’ fell by 4.9%. There was a sharp deterioration in respondents’ 10 September 2014 assessments of the economic outlook. The sub-indexes tracking views on “economic conditions over the next 12 months” and “economic conditions over the next 5 years” fell by 8.4% and 9.2% respectively. The sub-index tracking assessments of ‘whether now is a good time to buy a major household item’ fell by 1.9%.

Of most concern here is the five year economic outlook. This component is typically much more stable than the 1 year outlook but the print in September is the lowest for 16 years. It is down 28.6% on its level from a year ago. Concerns around the medium term outlook are likely to make households more cautious.

Logically, such concerns indicate that households expect any current economic weakness to be sustained for a considerable period.

The ‘news heard’ indexes indicated that respondents remain nervous around the labour market. These concerns were emphasised by the 2.1% increase in the Westpac–Melbourne Institute Unemployment Expectations Index (recall that a rise in the Index shows heightened concerns around the employment outlook). Fortunately, the Index is still 2.0% below its average for the first half of 2014 but there appears to be no sign of any sustained improvement in respondents’ outlook for the labour market.

Households continue to expect house prices to keep rising. The Westpac–Melbourne Institute House Price Expectations Index rose by 1.9% to be 25.5% above the level in July 2012 and 7.4% higher than July 2013.

However, there was an 8.2% fall in the index tracking assessments of ‘time to buy a dwelling’. This index is now 23.2% below its peak level in September last year. Clearly, households are unnerved by rising prices, surmising that affordability issues are constraining the attractiveness of buying a house. As we saw in the recent housing finance statistics, the momentum in the housing markets is clearly moving towards investors who are motivated by prospective price gains and rental yields and less affected by affordability considerations.

The September survey included additional questions on the ‘wisest place for savings’. Responses show just over a third of consumers (34%) now favour ‘bank deposits’, up significantly on June’s 27%. While that suggests a more conservative approach to finances, the consumers continue to show less emphasis on debt reduction with just 14% nominating ‘pay down debt’ as the best option – that compares with 17% in June and average readings of 20–25% between 2008 and 2012. ‘Real estate’ was still viewed relatively favourably with 26% nominating this as the ‘wisest place for savings’ in line with the reading in June. Fewer consumers favoured ‘shares’ (8.5% down from 10%) and ‘super’ (4% down from 5.5%). The mix suggests a further slight increase in consumer caution but still a marked improvement on the risk averse attitudes prevailing two years ago.

The Reserve Bank board next meets on October 7. The disappointing results in this survey are consistent with a need for lower interest rates rather than higher interest rates. However, the Governor has made it clear that lowering interest rates is not on the policy agenda. In his recent statement following the September Board meeting he reiterated his guidance that “the most prudent course is likely to be a period of stability in interest rates”. This survey indicates that households are still concerned about the jobs market. However in a recent speech the Governor noted that “while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that”.

Consequently we cannot expect anything apart from a no change decision at the upcoming meeting. We continue to expect that rates will remain on hold for another year until they are raised next August. Of course, issues around the recent Budget, which are still unnerving households, will have been resolved and we expect that households will be encouraged by their much improved balance sheets to lift spending.

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My own take is a little more straight forward. Consumers are aware that:

  • housing is a raging bubble
  • iron ore is crashing
  • the country is run by idiots

There’ll be no recovery in “balance sheet” spending given the above and there’s no income to spend either. Rate cuts coming.

Comments

    • That is the elephant in the room.

      And to have Morrison talking about expanding 457 visas is hardly going to help. Labour force figures tomorrow too.

    • Strange Economics

      Investors buying for “rental yield”? Joke.
      Net yields after cost on apartments are 2.5%, and for houses less.
      Local investors buying for tax losses, capital gains, and flipping has started (including in my street).
      Foreign investors buy to get the money to a safe haven (and often don’t even rent the place out as it exposes foreign income, tax issues, etc). e.g. See the high rise apartments in Melbourne, 50% don’t have any lights on during a weeknight.

  1. people who call for further rate cuts are DICKHEADS. Low rates encourage idiots to borrow too much, and smash those who actually have money in the bank.

      • MB has been calling for lower interest rates for as long as I have been reading this blog…………

        Which is something that I fail to accept. Just cast your eyes abroad – lower interest rates are the problem, they are at historical lows due to over exposure to record amounts of bloody debt and leverage.

        Calls for lower interest rates are only to protect the profligate and the greedy – fuck them all I say – they are all adults – let them have their come uppance ! No lessons will be learned otherwise without a bit of pain – it’s natural.

        So raise rates – ditch this talk of slashing rates because in the end, with lower interest rates nothing at all will be solved, it will only compound our problems.

        But yeah……keep up the call for lower rates MB…we will hold you accountable once the shit really hits the fan………

      • Bob, MB have been calling for lower rates in tandem with macroprudential tools to redirect cheap money into building a productive economy over the bullshit one we have now. I’m with you though, fuck ’em, hope they burn but fully expect every stop to be pulled in order to keep this bull shit economy afloat.

    • Yes I totally agree, lower rates have caused this BUBBLE and dropping them is just going to make it worse !!!!!

  2. Surely if consumers were aware that housing is a raging bubble, then it would have already burst? Kind of by definition? I think most consumers still view housing as the most rock-solid sure fire thing going. This view was only strengthened by house prices sailing through the GFC…

  3. Having the word “spanked” in a headline is gold. If property investors start losing money at some point in the future… please use the word “spanked” in future headlines.

  4. No surprises here. The continued erosion of wealth due to the heavily sub-inflation returns on savings after tax, coupled with the anti-wealth effect of the housing bubble now affecting a larger demographic of RE have nots by price exclusion or stress of humongous debts, is real and present. Luckily GS will drop rates soon to assist, because lower rates fix everything.

  5. Lower rates fix everything??
    Really? I thought they were pretty low now.
    Okay, lets get the rates to 0% and everyone will stop whining?
    What we need is a crash, since nothing else will change the status quo, and the status quo is f…..d.

    • Just because rates are way too low doesn’t mean they can’t go lower! Remember, Central Bank logic bears no resemblance to common sense, stability and equality.

  6. So a very interesting anecdote from a Chinese colleague of mine. He is a property speculator like the best of the rest, and his take on the housing market is …

    It is going to drop!

    Here were his reasons

    Due to the housing market crashing in China, the smart money that was going into the Australian housing market is now heading for the stock market, which has, after being stable for a number of years risen by 10% recently.

    It is much easier / less risky with the clamping down on money leaving China to invest in the stock market and as everyone piles in you can make a far bigger return than in Oz RE.

    Note that I use the term invest, his words were actually Chinese like to gamble and will have a punt on anything, that anything was Oz RE, but is not anymore

    Sure this will not crash the market overnight but it will remove the new joiners to the ponzi.

    • Sure this will not crash the market overnight but it will remove the new joiners to the ponzi.

      Not sure about that – the only reason people put their hand up is because someone else is.

      If they stopped and thought about it – no chance.