Consumer sentiment falls 3.8%, but result better than expected

Consumer sentiment has fallen by 3.8% in December, but the decline has been labelled “modest” in light of the third consecutive interest rate rise by the Reserve Bank of Australia.

The Westpac-Melbourne Institute consumer sentiment index has dropped to 113.8 during December, down from 118.3 in November. Chief economist Bill Evans said in a statement the result was surprising, given the current trend of rising interest rates.

“We expected that there was a real possibility that the index would fall much more sharply than the 3.8% which it has registered,” Evans said.

“With households now holding even more debt relative to their incomes we expect that we must be getting close to levels of the variable mortgage rate where households will become much more sensitive than is currently the case.”

Evans pointed to a previous result in March 2005, when consumer sentiment fell 5% after the variable mortgage rate rose to 7.3%. In comparison, he said, this drop was much more controlled.

“A closer inspection of the components of the index shows that those folks holding a mortgage have responded much more negatively to the rate increases than those who are not holding a mortgage,” Evans said.

“Confidence among those with a mortgage fell by 8.9% while confidence of those who are renting actually increased by 1.6%, and those wholly owning their homes registered a fall of 4.1%.

Evans also said some other positive factors included increases in the sharemarket, a higher Australian dollar, stable petrol prices and encouraging labour market figures. While news on interest rates has clearly impacted consumers, the news the overall economy is performing well has bolstered confidence.

“The run of interest rate increases has clearly affected sentiment towards housing with the “Time to Buy a Dwelling” Index down by a relatively modest 12.3% since September although, surprisingly, the Index actually increased by 2.5% over the month.”

“For households it appears that optimism about house prices may be offsetting any concerns about interest rates as far as housing is concerned. This broader optimism is supported by the 2.9% increase in households’ sentiment towards purchasing a motor vehicle over the month.”

Additionally, despite Evans’ prediction of another 25-basis point rise in February he said the evidence suggests “households overall are coping relatively well”.

“Optimism about house prices and jobs are partially offsetting the impact of rate hikes on consumer sentiment. We have little doubt that we are nearing a point where the level of the variable mortgage rate will start to elicit a much more negative response across all households but the evidence from this survey is that we are not there yet.”