Friday, June 11, 2010

Confidence slides; Investors prop up property

Consumer sentiment; Housing Finance
• The Westpac/Melbourne Institute consumer confidence index fell by 5.7 per cent in June – marking the third consecutive month of falls. In annual terms confidence is up just 1.7 per cent on a year ago.

• Over the past three months confidence has fallen by 13.7 per cent - the biggest quarterly fall since the period following collapse of Bear Stearns (April 2008).
• New home loans fell for the ninth time in ten months in April, down by 1.8 per cent. The number of loans to owner occupiers fell to the lowest level in 9 years. The average home loan across Australia stood at $286,900, up 7.6 per cent on a year ago.
• The value of investment loans rose for the second consecutive month up by 1.3 per cent in April. In annual terms investor finance is up 26 per cent on a year ago.

What does it all mean?
• Aussie consumers are sharply reigning in the exuberance that was evident earlier in the year. Consumer confidence has fallen for the third straight month and is barely higher than levels recorded a year ago. The interest rate hikes have been the main driver behind the less optimistic outlook. Especially given consumers have not had the opportunity to adjust and in the short term the impact on household budgets has been significant. Also the slide in equity markets certainly hasn’t helped confidence levels. In fact over the past three months confidence has fallen by almost 14 per cent – a result that was last seen over two years ago just after Bear Stearns collapsed.
• The latest consumer confidence result was flagged in the Roy Morgan survey released last week. Investors and analysts who seek timely readings of consumer confidence will be well served by tracking the Roy Morgan series each week. Especially given that it closely tracks the higher profile, Westpac and Melbourne Institute monthly consumer sentiment survey.
• Given the uncertainty in the economic environment and the attractive term deposit rates on offer, it is hardly a surprise that consumers widely believed that the safest place for savings is in the bank. Interestingly just three months ago paying down debt featured as a close second, however that view has shifted with consumers believing real estate being the second wisest place to park savings. No doubt the strength in property prices, falling unemployment and a growing population is resulting in investors looking at property as an attractive vehicle.
• The latest housing finance figures also confirm the attractiveness of property as an investment. While the number of loans for owner occupiers continues to slide, investment loans have tracked higher. Overall investment loans have posted decent gains for the past nine months and are now up 26 per cent on a year ago. The boost in the stock of investment properties should gain traction in coming months as economic conditions improve in the latter part of 2010.
• While the signs are encouraging on the investor front the same cannot be said for the owner occupier market. The cumulative interest rate hikes are certainly taking they toll on new housing activity. Housing finance has fallen by almost two per cent in April, and over the last ten months, housing finance has slumped by exactly 30 per cent. No doubt the likelihood of further rate hikes and the substantial growth in house prices are making potential home buyers rework their sums.
• Clearly the issues in the housing sector are centred around demand and supply of housing. The rate hikes have resulted in the demand for housing sliding (though from a very high base) however it would seem the stock of housing or new listings seem to be falling at a faster pace, a result that would justify the strength in house prices. However there are early signs that property prices are consolidating, and CommSec expects this trend to gain traction, with the lift in housing supply coming through the pipeline over coming months.
• When the latest consumer confidence result is coupled with yesterday’s weak business survey, it paints a picture of an economy that is going sideways at best. The implications for interest rates are clear. And with conservatism likely to continue, retailers will have to work hard for sales in coming months with consumers not willing to spend. Confidence is clearly paramount to the recovery cementing itself, and going forward the Reserve Bank may want to tread a little more cautiously on the rate hiking pathway, given that the global recovery is still in its infancy.

What do the figures show?

Consumer sentiment
• The Westpac/Melbourne Institute index of consumer sentiment fell by 5.7 per cent in June to 101.8. The index is now only up 1.7 per cent on a year ago, compared with the period in late 2009 / early 2010 where it was up over 30 per cent on a year earlier.
• The current conditions index fell by 8.7 per cent, while the expectations index fell by 3.5 per cent.
• Just one of the five components of the index rose in June
• The estimate of family finances compared with a year ago fell 17.7 per cent;
• The estimate of family finances over the next year fell by 4.2 per cent;
• Economic conditions over the next 12 months was higher by 2.8 per cent;
• The measure of economic conditions over the next five years fell by 9.0 per cent;
• The measure on whether it was a good time to buy a major household item fell by 2.2 per cent.
• There was a sharp fall in the gauge of whether it was a good time to buy a home (down 15.8 per cent to 94.6). There was a more modest fall in the gauge of whether it was a good time to buy a car (down 1.5 per cent to 127.7)
• Aussie consumers believe that bank deposits are the wisest place for savings (29.2 per cent of respondents), closely followed by real estate (21.7 per cent), paying debt (16.7 per cent), and shares (11.0 per cent).
Housing Finance
• The number of new owner-occupier housing loans fell for the ninth time in ten months in April, down by 1.8 per cent to 47,077 new loans - a 9-year low.
• Construction loans fell by 4.8 per cent, loans for the purchase of established dwellings fell by 1.8 per cent, while loans for the purchase of newly erected dwelling rose by 6.3 per cent. Refinancing commitments fell by 5.3 per cent.
• The value of new housing commitments (owner occupier and investment) rose for the second straight month, up 0.8 per cent in April. Owner-occupier loans rose by 0.6 per cent while investment loans rose by 1.3 per cent.
• First home buyers accounted for just 16.3 per cent of all lending in April, well below the record high of 28.5 per cent set in May 2009. Fixed rate loans only accounted for 2.4 per cent of all loans in April. And the average home loan across Australia stood at $286,900, up 7.6 per cent on a year ago. • Banks financed 91.1 per cent of all home loans (by value) in April, down from 91.4 per cent in March.

What is the importance of the economic data?

• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• 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?

• The Reserve Bank now has plenty of reasons to pause in its process of restoring rates to ‘normal’ levels. Not only is housing lending sliding, but retail spending, gauges of consumer and business confidence and activity, have all been soft in the past few months. It may prove temporary weakness of the economy, but for the Reserve Bank, it should be a case of being safe, rather than sorry.
• Looking forward, the weakness in recent housing data and increase in housing supply should result in the housing sector cooling 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.
• Retailers would certainly be concerned that Aussie consumers are now paring back confidence levels. Especially given that despite the relatively positive attitude over the last few months, spending has remained subdued. In annual terms retail spending has recorded little growth, and that has prompted major retailers to slash prices – a trend that will remain part of the retail landscape for the next few months.

Craig James, Chief Economist, CommSec

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