Sentiment

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EXPERT OBSERVER
The fall in sentiment this month is troubling as it comes against what should have been a supportive backdrop for confidence. The last month has seen a further 25bp interest rate cut from the RBA, the Federal government’s tax package pass through Parliament, more signs that the Sydney and Melbourne housing markets are stabilising and even some more improvement in the US-China trade dispute. Despite these positives, Australian consumer confidence has fallen to a two year low.
The main driver continues to be deepening concerns about the outlook for the Australian economy and prospects for family finances. The index components show the biggest decline in the sub-index tracking expectations for the ‘economy, next 12 months’ which slumped 12.3% to be down 16.4% since May to its lowest level in four years. Longer term expectations for the economy were also pared back sharply, the ‘economy, next 5 years’ sub-index falling 6.7%.
Deteriorating expectations for the economy outweighed any near term support from the prospect of lower interest rates and tax relief. The sub-index tracking consumers’ expectations for ‘finances, next 12 months’ also recorded a sharp 8% fall, moving back into net pessimistic territory for the first time since late 2017.
Consumer views around current conditions were better supported. The ‘finances vs a year ago’ sub-index lifted 3% to a five month high, although at 85.7, the sub-index remains at weak levels overall. Consumer attitudes towards spending also improved, the ‘time to buy a major household item’ sub-index rising 3.6% to the highest level since late last year. This will be of some relief given that consumer views around current conditions tend to be a better guide to current spending activity. However, that support could fade quickly if weaker expectations for near term prospects are realised.
Responses over the survey week show the Reserve Bank’s rate cut on July 2 had little or no impact on sentiment. Note that the bulk of the survey was completed prior to the government’s tax package passing into legislation on July 4, although this had been widely foreshadowed by media coverage earlier in the week. Indeed, the muted sentiment response to both interest rate cuts and tax relief may stem from the fact that both developments were widely anticipated. Notably, the sub-group detail showed no boost to sentiment amongst groups that stand to benefit most from policy easing: sentiment amongst mortgage holders declined 3.3% in the month and sentiment amongst middle income earners was down 5.5%.
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Other aspects of the sub-group detail point to some notable ‘sub-plots’. The initial impact of the surprise Federal election result in May looks to be fading with sentiment amongst “Coalition voters retracing over three quarters of the 7.5% jump in June. Sentiment also recorded a big 14% drop in regional NSW where drought conditions have intensified markedly in recent months. Sentiment amongst those with a trade qualification was also down a sharper 7.6% suggesting the residential construction downturn may be starting to weigh more heavily on some households.
Increasing concern about the economy is undermining consumers’ sense of job security. Confidence in the labour market continued to deteriorate sharply in July. The Westpac-Melbourne Institute Unemployment Expectations Index recorded a 5.8% rise, following on from a similar rise last month and taking the index materially above its long run average for the first time since mid-2017 (recall that higher readings indicate that more consumers expect unemployment to rise in the year ahead). Expectations have shown a more marked deterioration in NSW, Vic and WA.
Housing-related sentiment continues to show a clearer positive response to lower interest rates with assessments of both ‘time to buy’ and house price expectations recording strong increases in July.
The ‘time to buy a dwelling’ index rose 5.4% 123.2, the first above trend reading in four and a half years. The index is up 19.5% on the same time last year. The biggest turnaround continues to come in Sydney and Melbourne where substantial price corrections have also improved affordability over the last two years.
The Westpac-Melbourne Institute Index of House Price Expectations Index posted another robust 8.9% increase following last month’s spectacular 22.7% gain. At 119.4, the Index is now at its highest level since May last year but still below the long run average read of 125. All states have recorded sharp rises over the last two months and net positive reads comfortably over the 100 mark. Just over 40% of consumers expect prices to be higher in a year’s time – that compares to less than 20% back in March.
The Reserve Bank Board next meets on August 6. We expect the Bank to leave the cash rate on hold at this particular meeting but see further easing coming later in the year. Having delivered back to back 25bp cuts in June and July, the Reserve Bank has signalled that it is prepared to ease further “if needed”. Updated forecasts released in the August Statement on Monetary Policy, due August 8, will give the best guide to how the RBA sees the case for further policy action. At this stage it seems likely that the Bank will make only minor changes to its growth and inflation forecasts, suggesting policy will be unchanged at the August meeting.
However, policy is set to be in play at every Board meeting between now and the end of the year. Westpac continues to expect a further 25bp rate cut, most likely coinciding with a downgrade to the Bank’s growth and inflation forecasts in November. The specific timing of this next move remains highly uncertain – labour market developments could easily shift it around and there are other factors at play, both overseas and domestically. The Bank will also be monitoring policy sensitive sectors such as housing and the consumer closely to gauge the impact of its easing to date. On that count, updates on consumer sentiment clearly show interest rate moves have shored up confidence in the housing market but have not prevented a wider deterioration in sentiment.
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Sentiment falls 4.1% despite interest rate cuts and tax relief: Westpac

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NAB Economics have forecasted Sydney and Melbourne house prices to both decline over eight percent over 2019.
Melbourne is forecasted to see falls greater than Sydney.
Houses in the Victoria capital are expected to fall 8.8%, compared to Sydney's 8.4%.
The forecasts mean NAB expect Sydney house prices to fall 20% peak to trough, with Melbourne 15%.
NAB expect house prices in the two biggest property markets to continue to decline in 2020, just at a much slower rate.
<a href="https://www.propertyobserver.com.au/images/2019/4/11/nab%20economics%201%20.jpg" target="_blank">Click here </a>to enlarge:
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Hobart and Adelaide are the only capital cities forecasted to see house prices growth in 2019.
"Overall, we see the adjustment in house prices continuing in an orderly manner, with prices remaining well up on 5 years ago," NAB said.
NAB expect Sydney's unit prices to be the worst performing over 2019, with 7.2% declines forecasted.
Melbourne's declines are set to be softer at 4.3%, below Perth (-4.7%) and just above Brisbane (-4.2%).
<a href="https://www.propertyobserver.com.au/images/2019/4/11/nab%20economics%202%20.jpg" target="_blank">Click here</a> to enlarge:
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Market sentiment among 300 surveyed property professionals ticked a little in higher Q1 2019 as the monthly rate of house price decline eased in the first three months of the year.
The NAB Residential Property Index rose five points to a still very weak -15 as house prices in much of the country continued falling.
Sentiment was negative in all states bar South Australia and the Northern Territory (where annual dwelling prices in SA remain positive) and remained weakest in NSW and VIC where price falls were biggest.
Confidence was unchanged for the next 12 months, suggesting that market momentum will remain weak into 2020, however longer-term confidence improved with suggestions housing market conditions may start improving moving into 2021.
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Sydney property prices to decline by 20% from peak, with Melbourne down 15%: NAB

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EXPERT OBSERVER
In the latest March quarter survey only 8.8 per cent of respondents thought the ‘wisest’ place to put new savings was in ‘real estate’ – a record 46-year low.
The ‘wisest’ place for savings remains bank deposits (28.8 per cent of respondents) from ‘pay debt’ (26.3 per cent).
 Consumer confidence: 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.The consumer confidence figures have implications for retailers, and other consumer-focused businesses.
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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:
<ul>
<li>The estimate of family finances compared with a year ago fell by 5.6 per cent to 84.4;</li>
<li>The estimate of family finances over the next year fell by 5.9 per cent to 107.8;</li>
<li>Economic conditions over the next 12 months fell by 7.0 per cent to 101.4;</li>
<li>Economic conditions over the next 5 years fell by 5.5 per cent to 94.6;</li>
<li>The measure on whether it was a good time to buy a major household item fell by 0.6 per cent to 117.9.</li>
</ul>
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
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Real estate sentiment hits 46-year low: CommSec's Craig James

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Commercial property sentiment moderated for the second consecutive quarter, according to NAB’s latest index, though overall confidence improved in the September and the index is expected to rise to +38 in the next 12 months.
NAB’s Commercial Property Index was down 5 to +18, but remains above long-term average levels. 
“Although sentiment was above long- term averages in all markets (except CBD hotels), it continues to vary widely by property type,” said an accompanying release. 
The uptrend in office that started in mid- 2016 reversed in Q3 (down 11 to +28), with weaker outcomes reported in all states except WA (but still negative). 
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NSW leads in office markets (with sentiment at very high levels), followed by Victoria. 
CBD hotels re-emerged as the most positive sector (up 9 to +30). Retail market sentiment was also higher (up 6 to +12) and lifted in all states (bar WA &amp; NSW) with QLD leading the way. Industrial sentiment softened (down 15 to +2) - with sentiment lower in all states except WA (but negative). 
Overall confidence levels in commercial property markets improved in the September quarter - the index is now expected to rise to +38 in the next 12 months (from +30 previously) and +43 in 2 years’ time (+35 previously). 
“Confidence levels among surveyed property experts lifted in all sectors - most noticeably in the CBD hotels sector - which is likely reflecting strong fundamentals in key CBD markets, especially Sydney,” it said. 
Overall confidence levels in office were also slightly higher in Q3 as weaker (but still vey strong) outcomes in NSW and Victoria were offset by improvements all other states (particularly WA). 
In retail markets, confidence increased, with gains in all states. 
In the industrial property sector, gains were largely in WA and Queensland, with experts in the industrial property sector in Queensland also still the most confident of all states, and confidence levels in WA improving the most (but from very low levels). 
By state, lower overall sentiment was dragged down by NSW and Victoria. 
Sentiment lifted in SA/NT and WA (but negative) and was steady in Queensland. The state index for NSW fell (13 to 34), and was lower in all sectors. 
In Victoria (down 13 to +29) the index fell in Office and Industrial, offsetting an improvement in Retail. Sentiment continued to recover in WA (up 11 to -29), recording its strongest read since late-2014 (but still negative). Property experts in NSW and VIC were also less confident in the Q3 survey - but remain the most upbeat of all states in the next 1-2 years. 
Queensland is however bridging the gap, with confidence levels rising in all market sectors. Confidence in SA/NT also lifted solidly (from a small sample size) led by better outcomes in Office and Retail. In WA, confidence levels also improved - and in all sectors with a particularly big uplift in the Office segment. 
On average, property experts have lifted their expectations for capital growth in the next 1-2 years in all sectors. Expectations are strongest for CBD Hotels (2.3% &amp; 2.4%), followed by Office (1.9% &amp; 2.3%), Industrial (0.9% &amp; 1.9%) and Retail (1.3% &amp; 1.1%). 
Capital growth expectations for Office property were pared back but are still highest in NSW (3.4% &amp; 3.2%) and Victoria (1.8% &amp; 2.8%). They were revised up in Queensland (0.8% &amp; 1.5%) and in WA (-0.1%&amp; 1.9%). QLD is expected to provided the best capital returns in Industrial markets (2.0% &amp; 3.5%), followed by NSW (2.1% &amp; 2.8%). 
Industrial capital values in WA are tipped to fall heavily next year (-1.9%) and grow in 2 years’ time (0.4%), with weaker growth also predicted for Victoria (0.9% &amp; 1.2%). Overall capital growth expectations in Retail improved again in Q3 (1.3% &amp; 1.1%), with Queensland and Victoria the stand out states. 
The national Office vacancy rate was unchanged at 9.7% in Q3. Vacancy rates were reportedly lowest in VIC (4.3%) and NSW (6.3%) where strong tenant demand and take-up is continuing. Vacancy rates in SA/NT (12.3%), Queensland (13.0%) and WA (15.0%) were however still elevated. In Retail, overall vacancy climbed to 5.7% in Q3 to its highest level since late-2014. 
Vacancy increased most in WA (8.0%) and was lowest in Queensland (4.7%). In Industrial markets, vacancy also climbed to a survey high 7.0%, mainly reflecting a significant increase in available space in WA (10.0%). Looking forward, Office vacancy is expected to drift down in the next 1-2 years, with market tightness most apparent in VIC &amp; NSW. Vacancy is also expected to improve in Queensland, SA/NT and WA, but remain high amid large supply over-hangs in WA. 
 
 
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