Strong bounce in house buying sentiment as overall consumer sentiment remains flat: Westpac

The latest Westpac-Melbourne Institute Consumer Sentiment Index augers well for the spring buying season, with the "time to buy a dwelling" sub-index rising 7.6% in September.

The sub-index increased from 118.5 points in August to 127.7 points in September – now well above the 100 mark where optimists and pessimists are equally weighted.

Consumers are now marginally more confident about buying a house than buying a car, with the sub-index tracking "time to buy a vehicle" down 0.2 points in September to 126.1.

The improvement in house buying sentiment also contrasts starkly with the sub-index “time to buy a major household item”, which fell 0.5 points to 124.9.

Overall consumer sentiment rose by a modest 1.6% in September from 96.6 in August to 98.2 in September, the seventh consecutive month that the index has been below the benchmark 100 reading.

The results were based on a survey of 1,200 adults aged 18 and over conducted from September 3 to September 8. The RBA left the cash rate unchanged at 3.5% on September 5.

Westpac chief economist Bill Evans noted that apart from the 2008-09 period (in the wake of the GFC) when the index held below 100 points for 16 consecutive months, this represents the longest run of consecutive ‘sub 100’ prints since the early 1990s.

Evans says consumers are clearly stuck in an extended ‘cautiously pessimistic’ phase.

“In September last year the Index printed 96.9 so it has only increased by 1.3% over the whole year. That is despite 125 basis points of rate cuts from the Reserve Bank; a more or less steady unemployment rate which is close to full employment; and some recent positive news around the threatening European situation.

“This does not bode well for consumer spending and is consistent with the slowdown in consumer spending indicated by the June quarter national accounts.”

AMP Capital Investors chief economist Shane Oliver also noted the improvement in September but tweeted that the level of 98.2 “remains sub-par and little different to when rates started coming down late last year”.

Similarly Business Spectator and Market Economics economist Stephen Koukoulas tweeted that consumer sentiment is still “fragile at best”.

“Fits fit picture of economy doing OK but with more risks to the downside than up," Koukoulas said.

In his analysis Evans noted the improved outlook from households with the sub-index tracking views on “family finances compared with a year ago” up 0.3% compared with the forward-looking “family finances over the next 12 months” sub-index which rose 4.8%.

“By June this year we were particularly concerned by readings on “family finances over the next 12 months”, which was printing at a level around the low point of the 2008-09 period.

“Since then we have seen an encouraging improvement in this component which has increased by 11.4%.

“However, it is still at a historically low level.

“For example the average print of that component during that 2008-09 period when the index registered 16 consecutive months below 100 was 105.2 – today’s print of 96.2 is still well below that average.

“We can only conclude that respondents remain concerned about their finances despite the recent rally.”

Evans says Westpac expects the RBA to cut the official cash rate by 50 basis points over two meetings by year’s end.

“The case for lower rates is strong. Inflation remains well contained and the RBA’s own forecast has inflation remaining consistent with the target over the next one to two years. Interest rates are only slightly below neutral levels.”

"In short, we think the case for lower rates has already been made and there must be a reasonable chance that the Bank will decide to move in October. However, central banks are conservative so a November ‘call’ for the first move looks to be more prudent," says Evans.