Is A Confidence Crisis Coming?
Hot on the heels of an unpopular Federal budget, consumer confidence has reportedly dropped faster in May 2014 than when the GFC unfolded in 2008.
Typically, as consumers become more pessimistic they save rather than spend, and are less willing to take economic risks. In turn, this often results in an economic contraction leading to higher unemployment, lower wages and weak economic growth.
The Westpac Melbourne Institute Index of Consumer Sentiment fell by 6.8% in May from 99.7 in April to 92.9 in May. A figure of below 100 indicates more pessimism than optimism.
The fall in sentiment is echoed by the ANZ-Roy Morgan consumer confidence poll (17/18 May) which, by any measure, plummeted after the Budget as indicated by the graph below:
No bounce was recorded the following week (24/25 May). In fact, confidence declined further pointing to the gloomy mood being more than an initial shock.
Impact On Property Investors
The property market is a complicated economic beast, influenced by many macro and micro economic drivers.
Yet, in my opinion, even more powerful than economics are the human emotions of fear and greed. That’s why if I could only monitor one key performance indicator as a determinant to near term prospects of the property market, I would study trends in consumer confidence.
Buying a home or investment property is a big decision. If a purchaser becomes worried about their job, pay prospects or financial security, the tendency is to delay any significant financial decision until after they feel more confident.
Conversely, those already feeling the financial squeeze may decide to wind up or exit their investment positions before conditions deteriorate.
In summary, falling consumer confidence can result in:
- Lower demand, as more people put off their buying decision
- Higher supply, as those in financial distress look to exit
- Lower auction clearance rates, as less property sells
- Diminished heat in the property market
- Less new loans
- Less construction permit applications.
A Warning For Property Punters
In further signs that the property market may have peaked, Westpac’s Chief Economist, Bill Evans noted:
“…attitudes towards the housing market took a tumble. The index tracking assessments of whether now is a good time to buy a dwelling fell by 6% and is now at its lowest level since November 2010, when the Reserve Bank had been lifting interest rates, and 25% off its highs of September last year. This response is unlikely to be solely driven by the Budget. Respondents have been lowering their confidence levels for some months. Confidence around housing is particularly fragile in the major states with the Index being down by around 30% from September’s highs in both NSW and Victoria.“
It seems a double whammy is emerging… lower consumer confidence overall, combined with lower housing optimising specifically.
Concluding Comments
Far be it for me to be a property downturn harbinger, yet the dark clouds and few spots of rain on the ‘property investing windscreen’ are hard to ignore.
The prudent conclusion? Now is a time for caution, not rampant speculation.
As I’ve said before, it’s always a good time to buy a good property. Just be realistic about your near term growth expectations, and understand that it’s no longer the season for quick and easy profits.
Comments
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I believe it’s a short term knee jerk reaction, when you actually look at the nuts & bolts of the budget, it’s not that bad, in most cases they are minor cuts, the deficit will actually rise in the short – medium term.
I am speaking from a Sydney property market angle (where I am based), my wife actually works for a small company that sells deposit bonds, she said in Sydney in the last few weeks the number of deposit bond applications has halved. I think it’s more a pause than anything else in Sydney. Watch this space
Watch this space indeed.
And for those who want to, here is a link to the ANZ-Roy Morgan weekly consumer confidence report:
http://www.roymorgan.com/morganpoll/consumer-confidence/consumer-weekly-rating
– Steve
It seems any currency except the USD are on the table! They are calling it De-Dollarization!
http://www.zerohedge.com/news/2014-05-13/russia-holds-de-dollarization-meeting-china-iran-willing-drop-usd-bilateral-trade
Engagement rings and economics.
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The federal budget has sent real shock waves through our communities. Many believe the drivers to policy decision are ideology rather than economics. In some cases I see no evidence to the contrary. The current administration reminds us that everything is up for grabs.
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A global backflip now means every promise is soured and this is where the panic or lack of confidence has its roots.
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If you catch a partner in a lie you are unlikely to rush out an buy an engagement ring. As a student of ecomonics it reminds me of a second year classroom exercise. This is really what this data tells us. Liers can’t be trusted and once you start questioning then analysis paralysis sets in. No decisions will be made. In the same way people will stop pulling the trigger on major purchases like housing and in particular investment property.
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However, the good news is just like relationships one bad experience does not usually put people off. Once the trust is back people will buy again.
I think the budget has something to do with confidence but I believe the five main reasons for the start of the downturn in confidence are.
1. High real estate prices and financial sector debt in Australia as result, that must be deleveraged in the years ahead.
2. A vicious cycle of falling resources prices and slowing exports and trade around the world
3. The inevitable burst of the greatest infrastructure and real-estate bubble in the world .. China
4. The growing world debt relative to GDP in most countries,
5. And the demise of the $USD as a world currency due to money printing and currency war with the Bric’s ( China Russia India, Brazil) and Saudi Arabia recent conflict with USA and the move to replace the Petro dollar . This will send shock to the US economy. Russia and China have already started selling oil in non $ USD
That’s more than enough reasons to be negative in the world and in particular our relatively small GDP country
Thanks for the contribution Phil.
What currency is being used for oil transactions in non-USD?
– Steve
I’m glad Steve ended the snapshot that now is a time to be cautious and have realistic expectations. I don’t feel now is the time to run for the hills, but to watch, be patient and use the best tool for the situation (be it a different property strategy, or move from property into another investment), and as always ensure your due diligence is suitable for the current economic climate (possibly being a little more methodical rather then the ‘back of the envelope’ due dili that might have got you through when the economy was rocking along).
For me, I’m looking at various property strategies as I don’t think that ‘one size fits all’ is healthy and I’m checking the economic health of the area to confirm the foundations are stable enough.
Fools by at the peak and sell at the bottom, whereas smart investors buy good assets when they go on sale.
What’s a good asset? One where the fundamentals make sense and the price is discounted in a market that lacks sense.
Thanks for the contribution ChrisA1
– Steve
Steve , May 14, 2014 – Russia Ministry of Finance is ready to green light a plan to radically … oil contracts that are going to be signed between Russia and China will be denominated in rubles and yuan, not dollars. … Russia will be forced away from a USD-denominated trading system and into one which faces China and India.
Steve
http://www.zerohedge.com/news/2014-05-13/russia-holds-de-dollarization-meeting-china-iran-willing-drop-usd-bilateral-trade
Hi Steve,
I was just reading the latest edition of API and thought I’d pass on John Lindeman’s comments on consumer sentiment.
“Consumer confidence is a result of housing price growth, rather than a cause of it, so sentiment can’t predict where growth will occur”
As I take it..Past growth/declines phases in the property market have had little correlation to rises and falls in consumer sentiment. An index the measures an Australian perspective on an individuals confidence to spend will have little affect on the diverse range of property markets that exist in Australia, all of which are driven by a variety of different variables.
Thanks for the great article. If anything I hope it brings perspective to the investors active in markets that are currently superheated in OZ. Unfortunately, actions in markets such as Sydney are heavily increasing the risks to the smaller investor, and calm is need to ensure swift action is not needed from the RBA.