Housing suffering from a crisis of confidence

Westpac and the Melbourne Institute have released July consumer sentiment results showing a sharp fall in the consumer mindset.

The index of sentiment fell to 92.8 points, its lowest reading since May 2009.

The magnitude of the fall was most surprising, falling by -8.3% during the month, the greatest monthly fall in the index since October 2008 when it fell by -11.0%.

Property sector professionals should pay a great deal of attention to the index because the readings correlate very strongly with transaction volumes.

The fall below an index value of 100 points indicates that survey respondents overall were more pessimistic than optimistic, the first time that outcome was recorded since May 2009.

Twelve months ago the index was recorded at a much higher 113.1 points, indicating that year on year the consumer confidence measure has fallen by -18%.

The Index comprises a number of other indices – current conditions, expectations, family finances last 12 months, family finances next 12 months, economic conditions next 12 months, economic conditions next five years and time to buy a major household item.

The biggest monthly falls across those sub-indices was for some of the forward looking indicators, with consumer expectations about economic conditions during the next 12 months falling -13.5% and expectations about economic conditions over the next five years falling by -10.2%.

The two indices recorded sharp falls over the year, down -27.7% and -20.6% respectively.

Clearly respondents don’t believe that the economy will be as strong as the Government, Reserve Bank and Treasury are predicting, with many households not reaping reported benefits of the mining boom.

It is important to note that the survey was completed prior to the Government’s carbon tax announcement and that may have contributed to some of the unease.

So how does the sluggish sentiment impact on the property market?

Obviously if consumers are uneasy about the overall state of the economy they will be less inclined to spend money on high commitment items such as homes. The adjacent graph details the relationship between sales volumes and consumer sentiment.

Typically when sentiment is high numbers of home sales rise and when sentiment drops so do transaction volumes.

The other influencing factor in lower sales volumes is increased propensity for consumers to save rather than spend.

As the population continues to increase and the requirement for new homes increases you would expect that the trend would be towards more home sales, particularly in our largest capital cities.

This is not the case currently as households act to deleverage and pay down outstanding debt sales volumes are trending lower.

Sales volumes are not helped by stamp duty on purchases, which acts as a disincentive to transact properties because of the additional cost over and above the purchase price.

According to the Australian Bureau of Statistics the Household Savings Ratio was recorded at 11.5% during the March 2011 quarter, which is around the highest levels since the mid-1980s.

Retail trade data released by the ABS highlights weak sentiment and increasing propensity to save, with retail trade increasing by just 2.2% over the year to May 2011.

The growth in retail trade over the year is well below headline inflation, which was recorded at 3.3% to March 2011.

Consumers show little propensity to spend and remain relatively pessimistic about the economy, particularly the prospects over the coming year(s) but the likelihood of a rebound in sales activity seems unlikely.

Fewer transactions are likely to result in increased demand for rental accommodation, ongoing decline in new dwelling approvals/commencements and further weakness in retail trade figures.

At some point down the track we anticipate that consumers will recommence spending on housing and retail items as they become more confident in the Australian and global economic outlook and more comfortable with debt levels.

How long that will take is anyone’s guess but given what has happened in the past it will likely be driven by improving confidence in the economy, reflected in the Consumer Sentiment Index.

We suspect that confidence will remain low and may fall further in coming months as the full affect of the carbon tax is felt and the European sovereign debt crisis continues to unwind.

Tim Lawless is research director at RP Data.