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Consumer sentiment towards housing improved in January, driven by growing optimism about potential mortgage rate cuts, according to new data.
The Westpac-Melbourne Institute’s ‘time to buy a dwelling’ index rebounded by just over 10 per cent in the month, to 89.9, more than reversing the fall recorded in December and signalling growing confidence among home buyers.
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Consumer sentiment tied to home buying improved across all state and regional breakdowns while the same trend occurred for all age groups and for renters and home owners with a mortgage.
Westpac chief economist Luci Ellis said: “The increase could reflect a combination of the growing view that mortgage rate decreases are coming, and a recognition that housing prices have slowed or even fallen in most population centres.”
However, she said that sentiment towards housing is still below historical levels. Sentiment for buying a dwelling among outright owners declined slightly in January, but remains above the levels seen for most of the past couple of years.
House price expectations continued to soften in January. The index of House Price Expectations fell 5.9 per cent to 134 in January, more than 15 per cent below this time last year, and slightly under the longer-run average.
Falls were recorded in every state and territory except NSW, with sharp declines in Queensland, South Australia, and Tasmania.
The survey was carried out between January 6 and 9.
‘Shift in expectations’ for rate cuts
Consumers’ views on the outlook for interest rates were broadly unchanged in January, according to Ellis.
The Westpac-Melbourne Institute Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, edged down to 105.7 in January from 105.8 in December.
The incremental fall is the fourth consecutive month where the share of consumers who expect rates to increase outnumbered those who expect rates to fall by 5 percentage points or less, a much narrower margin than in recent years.
“Within the overall view on interest rates in January, homeowners with a mortgage were more likely to expect a rate cut than either renters or outright owners,” Ellis said.
“While the share of mortgagors expecting a cut has exceeded that of renters for more than a year, the increase this month has put them ahead of outright owners as well. This shift in expectations may help explain why sentiment more broadly has improved for this group relative to both renters and outright owners.
“That said, most consumers expecting rate cuts expect mortgage rates to fall by no more than 1 per cent over the next 12 months.”
Looking ahead, Ellis referenced recent communications from the Reserve Bank of Australia (RBA), which indicate that the board is becoming more confident about returning inflation to the 2–3 per cent target band.
“However, the latest sentiment survey highlights some of the ‘mixed signals’ still coming from the consumer,” she said.
“There is still a chance the board moves in February or April, if inflation comes in below expectations for the December quarter. On balance, though, Westpac expects the board to leave interest rates unchanged at its February meeting, with an easing expected to commence in May.”
The RBA board next meets on 17–18 February.
Consumer confidence sours
Overall, the Westpac survey showed that sentiment dropped in early January for the second month in a row as a depreciating Australian dollar against the US dollar drags down outlook.
The Westpac-Melbourne Institute Consumer Sentiment Index dropped marginally in January as concerns over the broader economy led to a gloomy outlook.
Consumer sentiment fell 0.7 in January to 92.1, down from 92.8 in the prior month although the mood remained more positive than a year earlier.
Despite the consumer mood improving over the past year, it remains sombre, with 100 points the line dividing pessimism and optimism.
Looking ahead, some index components suggest consumers expect things to improve.
The headline index is based on five subindexes: two tracking current conditions and three tracking expectations. In January, the two subindexes tracking current conditions declined while the forward-looking ones were flat or increasing, a reversal of the pattern in December.
Westpac hypothesised that a drop in consumer mood may be explained by the depreciation of the Australian dollar against the US dollar, which resulted in negative news about the outlook for interest rates and the broader economy.
Key figures from the index include:
- Consumers’ assessment of their finances compared with a year ago fell 7.8 per cent in the month to 77.7.
- For the same component, renters recorded a small decrease in the month, while home owners with a mortgage saw a 15 per cent increase, back to levels not seen since 2022.
- The ‘time to buy a major household item’ component increased 1.8 per cent in the month to 90.8.
- Unemployment expectations got worse, despite recent data on low unemployment and higher job vacancies. The Westpac-Melbourne Institute Unemployment Expectations Index rose a further 2.8 per cent to 127.2 in January (a higher reading means more consumers expect unemployment to rise over the year ahead).
- Views about the economy in five years’ time inched up – 0.7 per cent higher in January – but at 96.6, they remain below November’s level.
[Related: ANZ brings forward rate cut call to February]
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