Lower consumer sentiment could see housing market repercussions: Cameron Kusher

Consumer sentiment has recorded a significant uplift since late 2011, however if recent weaknesses in the measure continues we are likely to see repercussions for the housing market despite the low interest rate environment.

Based on the May results, consumer sentiment fell by -7.0% over the month following a -5.1% fall in April which now sees the index sitting at 97.6 points; the lowest reading since August 2012 and indicative of higher levels of pessimism than optimism.

While inherently a volatile monthly measure, sentiment based on the index results tends to react to the latest news and worldwide economic events where as an example, it was widely reported that the federal budget announcement was largely responsible for the weakness this month.

Nevertheless, looking at the six month average sentiment figure, it sits at 103.7 points, only slightly more optimistic than pessimistic.

This would tend to suggest that consumer confidence remains fragile and is subsequently likely to be reflected in consumer spending habits.

With the results confirming that consumer sentiment eased over the past two months, RP Data anticipates that these results may foreshadow a slowdown in other sectors of the economy, specifically retail spending and housing.

It is reasonable to say that for any buyers wanting to purchase a home in the near future, they would be seeking to find more confidence in the economy so they are secure with their ability to service debt levels.

We have investigated the annual change in capital city home values against the annual change in the six month rolling average reading for consumer sentiment where ever since the beginning of 2008 there has been a strong correlation between home values and sentiment.

With the monthly consumer sentiment reading falling by -11.7% since March 2013, we would expect the lower sentiment reading to have a dampening effect on dwelling value growth.

According to the rpdata-Rismark Home Value Index results, combined capital city home values fell by -0.5% in April and are down a further -1.1% over the month of May to date.

This suggests that the lower confidence readings may already be at work.

Interestingly, capital city values have been falling despite the fact that clearance rates have been strong throughout 2013 and are currently at their highest levels in three years. Of course, auctions represent just a small proportion of all sales and are more reflective of the premium housing market.

We believe that the auction market is likely responding to the fact that equities markets have recently rallied, premium home values have fallen by a much greater amount than other sectors of the market and mortgage rates are at very low levels on an historic basis.

The consumer sentiment trend in the Westpac & Melbourne Institute Index also shows a strong correlation with housing market activity where the rpdata findings show an annual change in sales volumes in Sydney, Melbourne and Brisbane and the annual change in the six month average consumer sentiment reading.

Once again, there is a reasonable correlation between the two readings. Based on the recent decline in consumer sentiment it can be expected that sales activity may also slow over the coming months.

Of course no one truly knows the future direction of the housing market but if recent trends are anything to go by it will be heavily influenced by consumer sentiment.

The two months of weakness in data could easily be reversed over the coming months however; the volatility in consumer sentiment and global economic uncertainty is making consumers much more cautious.

This fact is highlighted by additional data which shows households are saving around 10% of their income and have done so consistently for the past five years.

Another finding worth noting is the statistics produced by the Reserve Bank (RBA) on credit and debit card debt. On average, the results show that the outstanding balance on credit cards over the 12 months to March 2013 has fallen by an almost record -2.4% over the year.

The total number of credit card transactions has increased 1.7% over the year compared to average annual growth of 5.8% over the past decade.

Conversely, the number of debit card accounts increased by 6.7% over the year compared to the decade average annual growth of 4.2%.

These results show that consumers prefer to use their savings over borrowed money.

There has been clear evidence of weaker housing market conditions over the second quarter of 2013. The housing market is highly seasonal and we anticipated a slowing of conditions over the current period however, it is likely that the magnitude of the slowdown and subsequent value falls has been heightened by falling consumer sentiment.

Should this continue, it is reasonable to anticipate a less active housing market where value growth is lower than when confidence was much more buoyant.

Cameron Kusher is senior research analyst at RP Data.