What does the recent improvement in consumer confidence mean for the Australian housing market?

The relationship between consumer confidence and housing market activity is a topic that we often comment on in relation to the housing market.  The importance of a positive consumer mindset is simple; for a prospective buyer to make a high commitment purchase decision like buying a home they need to have a base line level of optimism about their job security, their ability to service a mortgage and the prospects for the housing market.

To illustrate the importance of consumer sentiment in the home buying decision making process we can show the correlation between sales volumes and consumer confidence.  The trend in consumer confidence and national sales volumes has shown an 84% correlation since the start of 2008.

There is also a lagging correlation between mortgage rates and consumer confidence, as can be seen in the graph below.  Generally, when interest rates are falling consumer confidence will show an improvement and vice versa.

The big question at the moment is where consumer confidence is heading from here.  In August, the Index published by Westpac and the Melbourne Institute was getting close to the lows seen back in late 2008 when the GFC was in full swing.  The September figure, which came through earlier this week, showed an 8.1% improvement in the confidence index, perhaps marking the turning point for this important indicator.

The ‘Time to Buy a Dwelling’ Index, which is a subset of the Consumer Sentiment Index showed a strong bounce over September, improving 14.3% over the quarter and 16.4% over the year.  This component of the Index has bounced back to levels not seen since September 2009, the month prior to interest rates commencing their tightening cycle.

Interest rate stability and the prospect of rates potentially falling may see confidence continue to improve.  If the cash rate does actually come down, as the financial markets and a growing number of economists are expecting may be the case, we may see a more significant improvement in the Consumer Sentiment data when it is released each month.

In balance, any significant or swift rise in consumer optimism is likely to be tempered by any further softening in labour market conditions or deterioration in global/local economic conditions.  Uncertainty surrounding both these factors is likely to continue to provide some counter balance to improvements in the consumer mindset.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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3 Responses to What does the recent improvement in consumer confidence mean for the Australian housing market?

  1. Jason | Property Pursuit September 15, 2011 at 4:24 pm #

    Interestingly we’ve purchased the most properties for clients during times when the Time to Buy a Dwelling Index was saying it wasn’t a good time to buy. Classic example of herd investment mentality I guess.
    From a Brisbane market perspective we are busiest when property markets are at the top leading into the bottom of a cycle and the quietest when we’re at the bottom leading into the recovery phase of the cycle. Property doom & gloomers tend to crawl out from under their rocks around this time in the cycle as well.
    ‘edit the last comment if you like’

  2. Randy October 1, 2011 at 2:02 pm #

    Great data and a very interesting read….wish we had a ‘time to buy a dwelling’ index here in Canada…our local market has been pretty good, so far we have avoided the problems of the U.S….

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  1. John Pye Real Estate » Blog Archive » Consumer Confidence and the Housing Market Activity - September 29, 2011

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