Australia | Dec 09 2009
By Chris Shaw
The recent increases in official interest rates by the Reserve Bank of Australia (RBA) have not had a significant impact on consumer sentiment as the Westpac-Melbourne Institute Index of Consumer Sentiment fell just 3.8% in December to a reading of 113.8, down from the 118.3 recorded in November.
In the view of Westpac chief economist Bill Evans, the December fall is a surprisingly modest outcome given the interest rate hikes of recent months as the RBA increases mean standard variable mortgage rates are now between 6.5-6.75%, up from around 5.75% as recently as September.
Over the same period from September the Consumer Sentiment Index has fallen by 4.7% and Evans had seen a real possibility of a sharper fall from what had been near-record highs, as when interest rates were previously in a tightening cycle beginning in March of 2005 the index posted double digit falls each time rates were increased.
The difference is the standard variable mortgage rate now is not as high as was the case in 2005, but in Evans’s view the fact households are now holding more debt relative to their incomes suggests the variable mortgage rate is getting close to the level where households will become far more sensitive to increases than the survey currently suggests.
Looking more closely at the figures, Evans notes those households with mortgages have not surprisingly responded far more negatively to the rate increases than those without, confidence among those with mortgages falling by 8.9% in the last survey compared to a fall of 4.1% for those owning their own home. Confidence among renters actually increased by 1.6% in December.
Other factors have contributed to the confidence of those without mortgages as the share market rose 2.4% for the month, the Australian dollar was a little better and petrol prices were broadly steady. Even more important, according to Evans, was encouraging news with respect to the labour market, as 25,000 new jobs were created in November when the market had been forecasting losses instead.
All the components of the Index fell in December, with the assessment of current conditions falling 2.1% and expectations declining by 4.9%. Family finances compared to a year ago registered a 1.9% decline and the survey showed a 2.9% fall in response to the question of whether now is a good time to buy a major household item.
The five-year economic outlook fell 1.4% but again Evans viewed this as a minor fall, while concerns over the short-term outlook are apparent given family finances over the next 12 months declined by 6% and the reading for economic conditions over the next 12 months was down 7.2%. The rate increases have impacted most on the housing market, Evans pointing out the time to buy a dwelling index has fallen 12.3% since September.
As Evans notes, the RBA board doesn’t meet again until February and at that meeting he expects a further 0.25% increase in the cash rate as the evidence suggests households are currently coping relatively well with the rate hikes to date, thanks largely to improved optimism about house prices and jobs.