Consumers temper confidence. First home buyers in retreat.

 

Consumers temper confidence.
First home buyers in retreat.

Author: Savanth Sebastian, Economist
Source: CommSec
Date: February 2010

Consumer sentiment; Housing Finance

• Consumer confidence eased in February, in response to the recent slide in equity markets and concerns over the strength of the global recovery. The index of consumer sentiment fell by 2.6 per cent to 117.0 in February. Overall consumer sentiment is still 16.5 per cent higher than a year ago.
• Lending for new homes eased in December as first home buyers continued to exit the market. The number of loans by first home buyers was the weakest in 13 months and almost 37 per cent lower than the record highs reached in May.
• Construction loans fell by 6.4 per cent while the value of all loans fell by 2.8 per cent in the month. Investment loans rose by 1.9 per cent while owner-occupier loans fell by 4.7 per cent – marking the sharpest falling in 20 months.

What does it all mean?

• Consumer confidence has eased in the latest reading and as we highlighted earlier this week a small fall insentiment was always on the cards - especially given the weaker reading in the Roy Morgan weekly survey ofconsumer confidence on Monday.
• Both surveys employ similar sample sizes and similar methodologies. And, as you would expect, results are alsosimilar. Overall Aussie consumers started 2010 in fine spirits, however the recent jitters in the Euro-zone and resulting slide in equity markets have seen confidence levels being pared back from unequivocally optimistic levels.
• Consumer sentiment has eased by 2.6 per cent in February, however in annual terms confidence levels are over 16 per cent higher than a year ago and are still holding at levels that are historically consistent with a healthy level of optimism that should support economic activity.
• No doubt the Reserve Bank’s decision to leave interest rates on hold has supported what could have otherwise been a larger fall in confidence levels. Underpinning the overall strength in confidence levels is the sustained improvement in labour market conditions. The unemployment rate is holding at an eight month low of 5.5 per cent –a result that would ensure concerns over job security are fast diminishing and ensure that consumers emainrelatively more optimistic about the future.
• The additional government grant for first home buyers has been pared back and is clearly being reflected in the latest data. The number of loans by first home buyers has fallen to the lowest levels in 13 months. Looking forward the near term data is likely to look weak, largely due to potential home buyers having brought forward planned purchases over the past year.
• The interest rate hikes are also taking out some of the heat from the property market. Housing finance slumped by over 6 percent in December after an even bigger fall in November. The Reserve Bank has recently commented that the average mortgage rate is only holding 45 basis points away from the decade average. Clearly with most of the stimulus being pared back and the likelihood of further rate hikes is likely to dampen enthusiasm in the housing sector.
• Overall the housing sector is likely to cool over the next few months. It is understandable that a period of consolidation is to be expected after what has been a phenomenal run over the last year. Importantly the sharp surge in construction loans over the past six months will continue have multiplier effects through the economy. • The pickup in investment loans is also encouraging. Overall investment loans have posted modest gains for the past three months and are now up 17 per cent on a year ago. The boost in the stock of investment property should gain traction in coming months as credit conditions continue to improve and investors look at property as a more attractive investment vehicle – particularly given the sharp improvement in job security.
• While the Reserve Bank would be happy with the latest results, it is unlikely to alter its interest rate profile based on the recent round of data. Rather the March rate decision will focus more on the sentiment in the global economy over the coming month. CommSec expects the Reserve Bank to raise interest rates to around 4.75 per cent by end year.

What do the figures show?

Consumer sentiment

• The index of consumer sentiment eased in February, down 2.9 points or 2.6 per cent to 117.0. The index is now holding 8.4 per cent away from the record highs reached in January 2005.
• The confidence index has soared by 16.5 per cent in annual terms.
• The current conditions index fell by 4.6 per cent, while the expectations index was lower by 1.3 per cent.
• Four of the five components of the index fell in February.
• The estimate of family finances compared with a year ago fell by 5.4 per cent;
• The estimate of family finances over the next year eased by 4.6 per cent;
• Economic conditions over the next 12 months was lower by 0.8 per cent;
• The measure of economic conditions over the next five years rose by 1.6 per cent;
• The measure on whether it was a good time to buy a major household item fell by 4.1 per cent.

Housing Finance

• The number of new owner-occupier housing loans fell by 6.2 per cent in December, after falling by 6.9 per cent in November.
• Construction loans fell by 6.4 per cent, adding to the sharp 7.1 per cent decrease in November.
• Loans for the purchase of established dwellings (excluding refinancing) fell by 6.9 per cent, while loans for the purchase of newly erected dwelling rose by 3.0 per cent. Refinancing commitments fell by 3.2 per cent in December.
• The value of new housing commitments (owner occupier and investment) fell by 2.8 per cent in December, after easing by 2.5 per cent in November. Owner-occupier loans fell by 4.7 per cent while investment loans rose by 1.9per cent after a 1.7 per cent rise in November. In annual terms investment loans are now 17 per cent higher than a year ago.
• First home buyers accounted for 21 per cent of all lending in December, easing further from record highs of 28.5 per cent in May 2009. Fixed rate loans only accounted for just 3 per cent of all loans in December. And the average home loan across Australia stood at $283,000, up 9.8 per cent on a year ago.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

• Overall Aussie consumers are remaining confident despite the recent weakness in equity markets. No doubt the latest result has seen confidence levels being tempered largely due to concerns about the recent concerns about
• European economies.
• Importantly household finances are in good shape, wealth levels are improving and labour market conditions have improved substantially. The bottom line is that consumers will keep spending in coming months.
• The Reserve Bank has indicated that it will lift rates gradually. CommSec would expect the cash rate to rise to around 4.75 per cent by the end of 2010.

 

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