Time to buy a dwelling index jumps in January: Westpac-Melbourne Institute Index

Encouraging signs for the housing market have emerged in the January Westpac-Melbourne Institute Index of Consumer Sentiment.

The sub-index tracking responses on “whether now is a good time to buy a dwelling” jumped by 6.5%, representing a 14.1% gain in sentiment over the past year.

But with pessimists outnumbering optimists for six out of the last seven months, overall consumer sentiment edged up only slightly in January. The survey was conducted from January 9 to January 12.

Despite rising expectations about the broader economy through 2012, economists say European debt woes and concerns over the labour market took the shine off falling interest rates.

A 2.4% increase took the Westpac-Melbourne Institute of Consumer Sentiment index to 97.1, still below the long-term average of 101.8 and well below the 120.1 result this time last year. The index is calculated from the results of several subindexes.

The rise in the overall index was largely due to an almost 10-point jump in the subindex measuring expectations of economic conditions over the next 12 months.

However, the subindex measuring family finances in 2011 suffered a 2.5-point drop, and the subindex measuring expectations of family finances over the next year rose only 0.7 points.

The release noted divergence between the sentiments of consumers regarding their own spending and their views of the wider economy – it says economic behaviour is more likely to be influenced by the latter.

"We've been resilient to external shocks, and that's become part of the way Australian consumers see Australia and our economy," Westpac senior economist Matthew Hassan says.

"There may be a disconnect between the mining-driven broader economy and what consumers are actually seeing."

The bank describes the result as "disappointing", as it showed the two interest rate cuts had only a minor effect on consumer sentiment.

"We've had quite an abrupt shift on interest rates," says Hassan.

"The RBA went from a tightening bias to cutting rates, with an expectation of further rate cuts on the way."

"Ordinary, if you move like that, you hope to get a sustained bounce in consumer sentiment."

"We have seen a rise, but the level of the index suggests the initial bump may be starting to fade."

Hassan says the steady drip of bad news from Europe may have played a role in the weaker-than-expected result, as might ongoing concerns around labour markets.

The RBA board will next meet on Tuesday February 7. Westpac expects the board to again cut rates by 0.25 percentage points.

Additional reporting by Myriam Robin of SmartCompany.