Housing sentiment defies broader mood

The Westpac-Melbourne Institute Index of Consumer Sentiment has revealed that there has been a moderate improvement in sentiment towards housing in July, but trends were uneven across the states.

Nationally, the “time to buy a dwelling index” rose by 4.1 per cent to 112.1, which is a six-month high. But this is still well below the longstanding average of 120.

The index for states returned varied results, with Victoria posting gains of 3.8 per cent, while NSW was steady. However, the index surged in Queensland (16.6 per cent), South Australia (14.6 per cent) and Western Australia (7.2 per cent).

Index levels have followed a similar pattern with Victoria (103.8) and NSW (106.9) falling behind Western Australia (124), Queensland (122) and South Australia (120).

Commenting on the varying state trends, Westpac chief economist Bill Evans said: “Clearly, affordability is a key driver of this discrepancy, but developments this month also point to a significant COVID effect emerging for housing across the nation.”

Mr Evans is referring to the resurgence of coronavirus cases over the last month, particularly in Melbourne. After averaging about 10 a day through late May and early June, new cases have spiked, running at close to 200 a day in July.

The survey for the index covered the week in which the lockdown was announced for Melbourne and some regional areas of Victoria, but the survey closed before the news of a new cluster was reported in Sydney.

Consumer expectations for house prices also posted strong gains, with the Westpac-Melbourne Institute House Price Expectations Index rising by 8.5 per cent.

“However, at 87.4, the index remains in deeply pessimistic territory, 42 per cent below the optimistic readings immediately prior to the COVID shock in March-April,” Mr Evans said.

“Expectations lifted across all states, including Victoria, which rose by 6 per cent although the state index is still 50 per cent below its pre-COVID high.”

Across the broader economy, the index for consumer sentiment fell 6.1 per cent to 87.9 in July, from 93.7 in June.

“The drop in confidence reverses all of last month’s impressive gain, taking the index back to the weak levels seen in May, but still leaving it 16 per cent above April’s extreme low of 75,” Mr Evans said.

Victoria’s sentiment index plunged 10.4 per cent in July, but sentiment across the rest of the nation showed milder falls, indicating the immediate impacts of coronavirus-related developments in the state.

The other states showed a combined decline in sentiment of 4.5 per cent.

“While milder, the weakness in other states is also likely to be linked to the outbreak in Victoria, reflecting concerns about the virus spreading interstate and spillover effects on the wider economy,” Mr Evans said.

Sentiment around the economy over the next 12 months recorded the biggest decline, slumping 14 per cent in July to be 25 per cent below pre-COVID levels. This compares with the 40 per cent drop during the first wave of the virus in March-April.

The “economy, next five years” sub index, recorded a steep 10.3 per cent decline.

“This is disconcerting as medium-term expectations for the economy held up reasonably well during the initial COVID shock – only falling 5.1 per cent in March-April – and were slightly above pre-COVID levels in June,” Mr Evans said.

“Our read is that, whereas previously, respondents were confident that the damage from the virus would be short-lived, the setback over the last month raises significant questions.

“There looks to have been a substantial loss of confidence around the ability to contain the virus permanently, limiting the extent to which the economy can return to business as usual.”

Sentiment around family finances took a milder hit, with the “finances vs a year ago” sub-index rising by 2.5 per cent. Mr Evans attributed this to significant “reopening boosts” in other states and government income support packages, which he said more than offset the negative impact of Melbourne’s recent lockdown.

Looking ahead, the government is scheduled to announce a fiscal update on 23 July, and while it will likely release some revised economic forecasts, the spotlight would be on its policy intentions for the December quarter and beyond.

Mr Evans said that before the announcement of lockdown in Melbourne, Westpac had revised its budget deficit estimate for 2020-21 from the $170 billion released in May to $240 billion. This incorporated measures such as the JobSeeker, extensions to JobKeeper and further stimulus in the October budget.

“With this sharp relapse in consumer confidence stemming from the latest news on the closures in Melbourne, the policy response is likely to be even greater,” Mr Evans said.

[Related: ‘Serious’ challenges ahead for housing demand: CoreLogic]