House prices are booming, auctions are at record levels, yet consumers aren’t loving it. Is consumer sentiment flashing us a warning sign?
Here’s a bit of a puzzle for you.
All the surveys suggest that consumers are feeling down in the dumps. They’re as sooky as Justin Beiber the morning after, but most people think house prices are going to continue to boom and now is a good time to buy.
House prices are booming but life sucks? Even grumpy cat’s in on it.
It’s a bit odd. Normally the two go hand in hand. When consumers are feeling grand, they’ve got more to spend, and they’re willing to splash out a little more on the house of their dreams.
AND at the same time, as house prices go up, people feel wealthier. They’ve got more equity to play with, and they become more motivated to fulfil their role as dutiful consumers.
But right now, sentiment and house prices are going in different directions. According to the Westpac Melbourne Institute Consumer Sentiment Index, general confidence dropped in February. It fell a fairly hefty 3% to the lowest level since July.
And the future’s not looking too bright either. Consumer expectations on the outlook for the economy over the next 12 months were at their lowest level since March 2012, having fallen 17.9% since this time last year.
Expectations for the next five years were at their weakest since February 2009!
Seriously, we’ve gone back to GFC era depression?
Is it really as bad as all that?
But the weird thing is that consumers know that house prices are going up. They’re not deluded about that. Their outlook for property is positively sunny.
The “Time to buy a dwelling” component of the index came in at 129.3 in February, practically unchanged through December and January.
It’s down a bit on the peak recorded in September, but you might expect that. Prices have been rising strongly since September; so in that sense, September was a better time to buy than right now.
But the take-home message is that this index is still firmly in positive territory, and quite away above the post 1975 long-term average.
People are also expecting prices to keep on rising. The house price expectation index is up 26% since the start of last year, and way up on the trough posted back in October 2011.
So people are very firmly of the view that prices are rising, and they’re going to keep on rising. And that means that it’s a good time to buy a house now, because if you wait any longer, prices are going to get away from you.
And I’d say that in this sense, people have got it exactly right. Because the property market has swung right round into boom.
Auction clearance rates hit record highs over the weekend. Clearance rates were up to 87.5% in Sydney and 79% in Melbourne. That’s huge! I don’t know if we’ve seen anything like it.
And it’s not just a small sample or anything. That actual number of houses on going to auction is surging, with almost 3,000 homes across the country going under the hammer last weekend.
This chart here shows just how pronounced the jump last week was.
And that’s on top of the huge momentum that’s already building in the market. Property prices in Sydney have well and truly launched and are going stratospheric. It’s only a matter of time before the rest of the country follows suit.
And that’s on top of record low interest rates driving affordability. The housing component of the Westpac survey tends to be driven by affordability, mostly connected to interest rates, and by expectations of future price increases.
I think the important thing to remember is that most people aren’t thinking about the economy on a daily basis. They don’t read the business pages. So unless it’s happening on the front pages (or in the sport section!) it’s not on their radar.
But the interesting thing is that so far the start of the year has given the economy lots of front page press – and none of it positive.
Holden is closing shop, Toyota’s in trouble. QANTAS have their backs to the wall.
And at the same time, the government is laying the groundwork for a potentially brutal budget. The first budget is the one to get tough on. It’s still close enough to the last election to blame the other mob, still far away enough from the next election for it to be completely forgotten.
And the government also seems to be willing to sacrifice jobs to make an ideological point (as in the case of SPC).
Take these together, and in isolation from what’s happening in the rest of the economy, and you’ve got a very scary picture.
But it’s a distorted image, and it misses what’s going on in the rest of the economy. Sure an unemployment rate that’s edging up is worse than one that’s edging down, but it’s still only 6%. Pretty decent in the scheme of things.
But people don’t remember that and no one’s going to tell them.
We’ve had a run of bad news that gives the casual observer the impression that the wheels are coming off. But once these have worked their way through the collective mind, consumer sentiment should come back into line with the house price series.
Which, in case you missed it, are booming!