Home buyers and investors more hawkish than economists

Some 83% of consumers expect rates to rise over the next year, but that’s down on the 91% recorded in February, according to the latest Westpac Melbourne Institute index of Consumer Sentiment.

Notably, just 26% in June (versus 38% in February) expect rates to rise by more than 1%, according to the Westpac Red Book, edited by Westpac senior economist Matthew Hassan.

Just over 12% of consumers now expect rates to stay unchanged over the next year (versus 7% in February), and 4% expect rate cuts, against 2% in February.

Average mortgage rates were unchanged between the two surveys.

The detail shows a broad softening in rate rise expectations but a particularly big mark-down in Queensland, which went from having the most hawkish consumers in February to the most dovish in June.

Younger age groups also cut rate expectations more aggressively and are notably less hawkish.

Consumers appear more hawkish on rates than markets and most economic forecasters. The spread of responses in June points to an average expected rise of 58 base points by June next year, well down on the 77 base points expected in February. That implies a standard variable mortgage rate of 8.4% by June 2012.

Source: Westpac Red Book

The overall Westpac–Melbourne Institute Index of Consumer Sentiment slipped 2.6% in June, from 103.9 in May to 101.2. Although the move was small and the index is still in optimistic territory, the index is now at its lowest level since June 2009, when Australian households were realising the local economy had ducked the worst of the “great recession” that had engulfed the major developed economies but were still fearful of the near-term outlook, according to Hassan.

Consumer views on whether now is a “good time to buy a dwelling” are less upbeat than responses to the other “time to buy” questions but still showing notable resilience. At 115.4, the index tracking responses is about seven points below its long-run average but a touch above the average since 2001, comfortably in optimistic territory (i.e. above 100), and well above the lows seen in previous market “corrections”.

Source: Westpac Red Book

However, Hassan notes market conditions are soft. Prices are slipping lower in most markets at about a 2% annual pace over the last six months. Auction clearance rates are also down sharply and near previous lows in Sydney and Melbourne.

"Conditions are notably weaker in Queensland, where Brisbane house prices are falling faster (at a 6% annualised pace) and have experienced a bigger correction to date (-6.9% versus -5.4% in 2008-09). The floods in early 2011 hit building activity, although they also reduced dwelling stock. The Queensland “time to buy a dwelling” index jumped sharply in June but has been very erratic this year. The Queensland Government’s latest decision to remove some stamp duty concessions will be a hit in the near term," the Red Book says.