The relationship between consumer confidence and housing market activity is a topic that we often comment on in relation to the housing market. The importance of a positive consumer mindset is simple; for a prospective buyer to make a high commitment purchase decision like buying a home they need to have a base line level of optimism about their job security, their ability to service a mortgage and the prospects for the housing market.
To illustrate the importance of consumer sentiment in the home buying decision making process we can show the correlation between sales volumes and consumer confidence. The trend in consumer confidence and national sales volumes has shown an 84% correlation since the start of 2008.
There is also a lagging correlation between mortgage rates and consumer confidence, as can be seen in the graph below. Generally, when interest rates are falling consumer confidence will show an improvement and vice versa. (Click on image to viewer a larger version).
The big question at the moment is where consumer confidence is heading from here. In August, the Index published by Westpac and the Melbourne Institute was getting close to the lows seen back in late 2008 when the GFC was in full swing. The September figure, which came through earlier this week, showed an 8.1% improvement in the confidence index, perhaps marking the turning point for this important indicator.
The ‘Time to Buy a Dwelling’ Index, which is a subset of the Consumer Sentiment Index showed a strong bounce over September, improving 14.3% over the quarter and 16.4% over the year. This component of the Index has bounced back to levels not seen since September 2009, the month prior to interest rates commencing their tightening cycle.
Interest rate stability and the prospect of rates potentially falling may see confidence continue to improve. If the cash rate does actually come down, as the financial markets and a growing number of economists are expecting may be the case, we may see a more significant improvement in the Consumer Sentiment data when it is released each month.
In balance, any significant or swift rise in consumer optimism is likely to be tempered by any further softening in labour market conditions or deterioration in global/local economic conditions. Uncertainty surrounding both these factors is likely to continue to provide some counter balance to improvements in the consumer mindset.
Source: RP Data (2011) http://blog.rpdata.com/2011/09/what-does-the-recent-improvement-in-consumer-confidence-mean-for-the-australian-housing-market/