Looming rates kill housing buzz: Westpac

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House-buying sentiment is at its lowest ebb in almost eight years while a majority of home-owning Aussie’s are bracing for more mortgage pain, according to the latest research from Westpac.

The Westpac-Melbourne Institute Index of Consumer Sentiment was up 2.3 per cent to 99.6 points in February, listing starboard from 97.4 points in January, but just below the circuit-breaking 100 mark, where the index tips from pessimism to optimism.

According to Westpac’s senior economist, Matthew Hassan, consumers reported family finance pressure and a mildly positive, but essentially mixed outlook for the wider economy.

“Consumers are more positive on the economy. Near-term expectations posted a solid gain and the ‘economic conditions, next 12 months’ sub-index is up 2.8 per cent, recovering all of the ground lost following the surprisingly weak September quarter national accounts,” he said.

Recent commentary from the RBA may have helped ease concerns with the central bank re-affirming it positive growth outlook.

“Consumers are less convinced about medium term prospects though,” Hassan added.

Stark contrast

Most notably, consumers expressed wariness about the outlook for interest rates. In the outlook for mortgages, 60 per cent of respondents expected rates to be higher in 12 months against just 5 per cent who are expecting further rate cuts.

Those numbers stand in stark contrast to the 37 per cent expecting higher rates when the same question was last posed back in August. Westpac noted that concerns about potential interest rate increases may have impacted on sentiment towards housing.

At the same time, the bank’s ‘time to buy a dwelling’ index dropped sharply, declining by 7.8 per cent. This index is now at its lowest ebb since May 2010, back when the RBA was near the end of its last tightening cycle.

Victoria, Queensland and WA all recorded 10 per cent plus declines in the month although the NSW Index remains the weakest across the states.

According to Richard Grainger, head of property at mortgage brokers Objective Wealth, while the Westpac data supports "an economy returning to a more sustainable rate of growth", there remains a "whiff of caution in the air".

"The index matches what we have been seeing in terms of refinances and customers looking to fix their rates, and that's coming off anxiety about rate hikes," he said. "In terms of the housing market, we still see Melbourne and Sydney as having another strong year while rates remain low, and caution on what lies beyond," he said.

Bold conclusion

The sentiment shadows to an extent recent RBA data that shows while housing prices picked up in the second half of last year, the trend could sour, especially if prices start to fall.

The RBA said that prices were robust in the latter part of 2016, particularly in the urban magnets of Sydney and Melbourne. A bold conclusion to 2016, especially across the Sydney and Melbourne markets, according to the central bank, “could see more spending and renovation activity than is currently envisaged".

However, “although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall," the bank added.

The Westpac index pointed to a wobbly new year for housing markets, and with the RBA Board next meeting on 7 March, according to Hassan, the RBA will in all likelihood be saving its bullets.

“We expect the Board will again decide to keep the official cash rate on hold," he said.

Hassan said recent commentary clearly sets out the central bank’s current policy approach to hold the OCR steady in anticipation of eventual movement upwards in growth and inflation while imbalances in the housing market remain contained.

Westpac now sees the rates-on-hold approach being sustained throughout 2017, supported by rising terms of trade, a peaking construction cycle and a “gradually falling” unemployment rate.

“We expect a similar policy stance in 2018 despite clear preferences in the market for the beginning of a tightening cycle,” Hassan said. “Indeed, Westpac’s view of a slowdown to below trend growth pitches the risks to the ‘on hold’ call in 2018 to the downside, in clear contrast to current market views.”

Westpac, housing, mortgage
Christian Edwards, cedwards@financialpublications.com.au
Article Posted:
February 17, 2017

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