The importance of consumer confidence

Changes to the official cash rate by the Reserve Bank over the years have a very clear correlation to the rate of home price appreciation or the change in home values.

When interest rates go down and are expected to keep going down, home values nearly always increase. Conversely, when rates go up and are expected to keep rising, home values nearly always typically reduce, or at least stay flat.

It is no coincidence that the upswing in the housing market, which commenced in June 2012, followed the commencement of the interest rate easing cycle in May 2012, when the RBA aggressively cut the cash rate by 50 basis points.

With interest rates low and expected to remain low throughout 2014 and into 2015, it is the other key driver, consumer confidence, that warrants closer attention.

When people feel confident in both their personal environment (their employment and financial situation) and the broader environment (interest rates, economic outlook, etc) they are far more willing to purchase a property.

The volume of property sales is an extremely important metric to monitor as it is a key driver of economic activity. Whenever a property is sold, a range of economic activity is generated which has a multiplier effect throughout the economy. Of course, this multiplier effect is even greater in the case of the construction and sale of newly constructed property.

Whilst the volume of property sales sits well below the peak of 2001-2002, property sales have increased by 20-25 per cent over the past 12 months or so, although there is clear evidence that the Sydney and Melbourne markets have begun to cool off in terms of both sales volumes and the rate of value increases.
This is despite the fact that the Westpac-Melbourne Institute Index of Consumer Sentiment has fallen by 9.6 per cent since November. The offset here is that consumers are likely to be more certain that interest rates will remain at their current low levels for longer than may have previously been anticipated.

It will be very interesting to observe the impact [of the Budget] on consumer confidence and how this flows through to the housing and mortgage markets. Additionally, the Budget will be closely watched for any impact on the motivation and incentive it has on people’s willingness to re-enter the workforce, work additional hours or seek supplementary employment, all of which are strong factors in people’s decision process about whether or not to enter the housing market or extend themselves further through additional borrowing.