Real estate sentiment hits 46-year low: CommSec's Craig James

What does it all mean?

Aussie consumers remain super-conservative. When asked what was the wisest place to put new savings, ‘bank deposits’ and ‘paying-off debt’ were ranked number one and two. Understandably with home prices falling, real estate didn’t feature in the top places for new savings. In fact the result for ‘real estate’ was the lowest since the survey began in 1973.

Aussie consumers aren’t confronted with a lot of financial news in the mainstream media nowadays. But when it is published it tends to be bad news. Last week consumers would have heard that the Australian economy slowed in the December quarter, that the Australian dollar had fallen to US70 cents, and that retail sales rose modestly in January.

There was speculation about rate cuts. Understandably this was picked up in the ANZ-Roy Morgan confidence index yesterday and today’s Westpac-Melbourne Institute survey. Confidence does bounce from week-to-week and month-to-month. Before the latest drop, Aussie confidence levels were actually above longer-term averages.

Westpac noted: “Responses over the survey week show a marked drop-off after the national accounts update. Those collected before the March 6 release had a combined index read of 100.7. Those collected after the release had a combined read of 92.7, an 8 per cent fall.”

If consumers are pessimistic, they may reduce spending. But much depends on the strength of the job market (at present, it is quite strong) and consumer prices (inflation rate is low). So it is a case of being alert and not alarmed.

The good news is that more homebuyers believe that now is a good time to buy a home. The index is at 5-year highs, up 30 per cent from the mid 2017 low.

What do the figures show?

The Westpac/Melbourne Institute survey of consumer sentiment index fell by 4.8 per cent to 98.8 in March after rising by 4.3 per cent to 103.8 points in February. The sentiment index is back below its long-term average of 101.3. A reading above 100 denotes optimism. The survey of 1,200 people was conducted from March 4-8.

The current conditions index fell by 2.8 per cent and the expectations index fell by 6.2 per cent.

All five of the components of the index fell in March after all rose in February:

• The estimate of family finances compared with a year ago fell by 5.6 per cent to 84.4;
• The estimate of family finances over the next year fell by 5.9 per cent to 107.8;
• Economic conditions over the next 12 months fell by 7.0 per cent to 101.4;
• Economic conditions over the next 5 years fell by 5.5 per cent to 94.6;
• The measure on whether it was a good time to buy a major household item fell by 0.6 per cent to 117.9.

Housing outlook: A good time to buy a dwelling? The index rose 3.5 per cent to 112.7, and was up 11.5 per cent on the year. House price expectations fell by 2.7 per cent to 85.4 and were down by 34.1 per cent on a year ago.

Unemployment expectations: Unemployment expectations rose by 8.9 per cent to 130.6 in March to be up by 7.2 per cent over the year.

Wisest place for savings: On the question of the ‘wisest place for savings’, banks (28.8 per cent) led the way from paying down debt (26.3 per cent). Only 8.8 per cent of respondents selected real estate while 7.5 per cent nominated shares. Overall a record 51.7 per cent suggested choices for putting savings other than traditional real estate, bank deposits, building society deposits, bonds or shares.

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?

Consumer confidence ebbs and flows over time, but the job market remains in strong shape. Provided unemployment remains low, job opportunities abound and wages tilt higher then consumers will continue to embrace ‘retail therapy’.

Consumers may currently prefer to put savings in other places than real estate but that could be about to change. The reading on whether it was a good time to buy a home has lifted to 4-year highs. Low interest rates, softer home prices and a strong job market are a heady mix of positive influences, balanced against a raft of new housing supply in the process of hitting markets.

CommSec doesn’t expect a change in official interest rates for the foreseeable future.

CRAIG JAMES is the Chief Economist at CommSec