Economic Insights

Economics
November 9 2011

Cheerier consumers but home loans shrink

Housing Finance; Consumer Confidence
Aussie consumers celebrate rate cut: The Westpac/Melbourne Institute index of consumer confidence rose by 6.3 per cent in November to a six-month high. The average home loan plunged by 1.9 per cent in September to be 0.6 per cent lower than a year ago the biggest fall in over a decade. More home loans: The number of new owner-occupier housing loans rose by 2.2 per cent in September. But bad news for builders: Loans for the construction of homes fell by 0.2 per cent in September. Loans for the purchase of newly erected dwellings fell by 0.7 per cent. But loans to purchase established dwellings rose by 2.6 per cent. Refinancing rose by 4.6 per cent to a 41-month high.

What does it all mean?

More Aussies are taking out loans to buy established houses and apartments, but clearly that is of no benefit to the struggling construction sector. Unfortunately loans to build new homes fell, not rose, in the month, pointing to further weakness ahead for builders, tradespeople and building material suppliers. However the hope is that the recent interest rate cut leads to a lift in building activity in the months ahead rather than just causing home buyers to bid up prices of existing houses and apartments. Certainly the rate cut had the desired response in boosting the confidence levels of Aussie consumers. More first home buyers were in the market in September, encouraged by lower fixed-term interest rates and cheaper home prices. The average loan size plunged 1.9 per cent in September, highlighting the drop in home prices and greater influence of buying activity at the lower end of the market. The average home loan is now 0.6 per cent smaller than a year ago. It may not sound like much, but it is the biggest annual decline in over a decade. If consumer sentiment hadnt lifted in the latest month, retailers and policymakers alike would have had reason to be very worried. But while sentiment predictably rose, the actual level of the confidence index suggests that consumers still harbour reservations about what lies ahead.

Craig James Chief Economist (Author)

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Economic Insights Cheerier consumers but home loans shrink

Interestingly men remain more confident than women. Many put this down to the fact that women still buy the groceries and pay the bills and are still focussed on rising living costs. The good news is that the gap in the confidence indexes for men and women has narrowed in line with the improvement in inflation. As you would expect, mortgagees are celebrating the rate cut with confidence for this group up almost 14 per cent in the month while the confidence reading for tenants actually fell by 6.8 per cent.

What do the figures show?

Housing Finance: The number of new owner-occupier housing loans rose for the sixth straight month, lifting by 2.2 per cent in September. However excluding the refinancing of dwellings, loans rose by just 1.0 per cent. Loans for the construction of homes fell by 0.2 per cent in September the third fall in four months. Loans to buy newly-erected dwellings fell by 0.7 per cent. But loans for the purchase of established dwellings (ex refinancing) rose by 1.3 per cent, while refinancing rose by 4.6 per cent. Lending rose most in South Australia (up 7.6 per cent) followed by ACT (up 6.0 per cent) and NSW (up 3.9 per cent). The value of new housing commitments (owner occupier and investment) rose by just 0.7 per cent in September after a similar increase in August. Owner-occupier loans rose by 0.7 per cent while investment loans rose by 1.9 per cent.

The proportion of first home buyers in the market rose from 15.4 to 16.4 per cent in September but still remains well below the long-term average of 20 per cent. Fixed rate loans accounted for 7.9 per cent of all loans in September, up from 5.6 per cent of loans In August. And the average home loan across Australia stood at $284,400, down 0.6 per cent on a year ago. Consumer sentiment The Westpac/Melbourne Institute index of consumer sentiment rose by 6.3 per cent in November after gains of 0.3 per cent in October and 8.1 per cent in September. The consumer sentiment index is up 0.3 per cent on a year ago. But the 12-month rolling average of the consumer sentiment index hit a 25-month low of 101.4 in November. The current conditions index rose by 3.9 per cent, while the expectations index rose by 8.1 per cent. Four of the five components of the index rose in November: The estimate of family finances compared with a year ago rose by 7.0 per cent; The estimate of family finances over the next year fell by 0.8 per cent; Economic conditions over the next 12 months was higher by 18.8 per cent; Economic conditions over the next 5 years rose by 7.4 per cent; The measure on whether it was a good time to buy a major household item rose by 1.8 per cent. Men (index reading of 107.5) remain more optimistic than women (99.4). Young people (18-24 years, index reading 113.7) are still more optimistic than older people (over 45 years; index reading of 98.7). But optimism of those over 45 years rose 7.1 per cent in November while optimism of Gen Y rose just 1.6 per cent.

What is the importance of the economic data?

Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such

November 9 2011

Economic Insights Cheerier consumers but home loans shrink

as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market. Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since. Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

The lift in consumer confidence was predictable but there is still a strong sense of caution. It may take another rate cut to boost retail and housing activity. Presumably home building will get a lift from the recent rate cut. But the current data is hardly positive for the home building industry. Population is rising but we arent adding to the housing stock, suggesting that established home prices will soon flatten and then start edging higher again. The increase in refinancing will serve to boost spending power of consumers and thus cheer retailers.

Craig James, Chief Economist, CommSec

November 9 2011