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.
So it’s little wonder then that people in the survey are so bullish on houses at the moment.
So the real question then is why consumers are feeling so glum about the outlook for the broader economy.
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!
Gary Powell says
Hello John,
Gary Powell. The behaviour of housing prices is a ‘reaction’ to the otherwise large amount of changes that we, the Liberal Party as a govt need to make to structures in this economy. Bringing it into line truly with overseas economies. True, supply and demand is likely play a dominant role in the sale & purchase of different properties. That in itself does NOT really ADD anything to the underlying economy.
A growth figure of 5% is what we require. Workable, believable & supported private sector program’s to reduce the longer term unemployed & underemployed into the workforce ad well.
I am a member of the Liberal Party.
Leo says
Hi Gary, I’m Liberal too, but not as silly to think we want to emulate overseas (poor) economies. Who do you suggest we model ourselves on? I heard Aus has the best and still safest economy in the world. (They ain’t be telling me fibs are they?)
Tom says
Firstly, may I say that it is a sad day when readers use Jon’s blog to promote their own Party-political bias. Such narrow-mindedness is the antithesis of sensible development.
Secondly, the current bi-partisan dominance of “Economics” over “Socio-economics” will be the death of our Australian society. An obsession with a surplus, while ignoring the people who actually generate the nation’s wealth, is a grossly retrograde philosophy.
The much-lauded Peter Costello and John Howard had such an obsession – and yes, they did produce a surplus. But at what cost? Incoming Government always drive their main philosophies through in their first budget. One of Howard’s first cost-saving actions was to castrate our tertiary education system. Low hanging fruit?
Where does your present local GP come from? In our town, our five all originated in other countries. The Coalition philosophy of letting poor, developing countries pay to educate their professionals, only to be lured away by our more affluent pay system is a gross injustice to both the robbed nation and to our own youth, who in a less ideology-driven environment would have been training in our own universities. Instead, they were sent to work at developing mines, but now find themselves joining the list of unemployed. As this list grows, the resulting downward pressure on wages will achieve the Coalition’s long-term aim of having a third world wage structure, where big business has control here, as it does in the US. Greed is good. A two-tier society is just an unfortunate byproduct. The plebs are just grist for the mills. They are not human beings. They are numbers, statistics.
These desperate family supporters are going to compete for the Government’s “Pie-in-the-Sky” high end jobs of the future. Pigs might fly too!!! Without a drastic change in our Tertiary education system NOW, we will be unable to compete with emerging countries which for several years have both recognised and acted upon the importance of having an educated workforce. We are faced with a block of unemployed, either untrained or highly trained for jobs our Government considers can be better sent overseas.
If we have businesses which are uncompetitive on the international market, which has been distorted by other governments’ subsidies, surely the best way to go is to keep them going in the short term, while at the same time developing those mythical Pie-In-The-Sky jobs of the future. The extra Tax collected from those who are still employed, both directly and indirectly, would surely more than cover the primary subsidies. We need Government/business/labour concords. Unfortunately, the leadership in all three sectors lacks the foresight for such negotiations.
Vive La Banana Republica!!!
Brett says
May i ask you who distroyed this great country! Was it Gillard and Rudd?
The carbon tax has destroyed a lot of business here and that useless Government we had before refuses to remove it along with the greens because they cant come to terms that they are no longer in power!
Leo says
Hi Jon. Maybe, it’s the the housing price rise owned by foreign investment. Canada has stopped their foreign investment model. Maybe, unemployment at 6% is false good news in light of the job loses from Ford, Toyota, Qantas, Etc are still pending. Expect dramatic changes when the jobs are gone, including those of many peripheral industries. Maybe, the wages of most Aussies are not really rising in line with the house price rises. It used to take around 4 years wages once, I believe it’s now approaching 9 years wages. If a house price rises by 7.2% per year (doubles in 10 years), what sort of wages increase is needed to keep up. I don’t know anyone outside of business owners that are getting that sort of pay rise. I heard media reporting that maybe, “All will be fine, the housing sector will take over from the mining companies as our economic saviours” – Not! Maybe, there is the spectre of the ‘second recession’ that historically follows the rampant printing of money to falsely prop up the economy is what is causing the lack of consumer confidence. I wonder myself where are we going when goods from China are the cheapest I seen in my extended lifetime and we still lack confidence. Maybe, it’s the fear our own jobs will go abroad also. Maybe I’m not really worried, as whatever happens to me will happen to everyone else too. Maybe, people won’t lose their houses as there won’t be anyone able to afford to buy them from the banks, except for those like you Jon, and maybe myself.