Aus housing: recovery proves elusive
After coming under intense pressure in 2008, the response of Australian households to aggressive policy stimulus since late last year will be a key determinant of how well the economy holds up in 2009 in the face of a massive economic shock from abroad. How the interest-rate sensitive housing sector responds is particularly important for medium term growth prospects – generating a lasting upturn will be critical for domestic demand once the initial cash-flow boost to households from policy easing starts to dissipate.
So far the early indications are mixed at best. Mood-wise, the latest Westpac–Melbourne Institute Consumer Sentiment survey shows consumers less pessimistic than they were through most of 2008 and much less gloomy than households in the US, Europe, the UK and Japan (see chart one). Whereas sentiment abroad is tracking over two standard deviations below average, Australian sentiment is less than one standard deviation below average.
However local consumers are clearly entering 2009 with great trepidation. They are getting plenty of direct support from policy easing – the boost to disposable incomes from interest rate cuts, fiscal stimulus packages and tax cuts is now expected to be an extraordinary $30bn in 2008-09, over 4% of annual income. Retail figures show at least some of this is already finding its way into spending with sales jumping 3.8% in December. That said, the spending bounce has been small given the scale of the injection to date (about $10.7bn). The fear is that once this direct policy boost to spending starts to dissipate – by about mid-2009 – and labour market weakening really starts to bite, households will begin to cut back more sharply on spending.
This is why generating a sustained improvement in housing activity is so critical to the medium term outlook for domestic demand. Sentiment-wise, the biggest issue is job security.
Consumers’ unemployment expectations – measured in a companion survey to consumer sentiment – continued to deteriorate at a rapid rate in January with the index over 40% above its long term average. These concerns are inhibiting the normal response to policy easing.
Although its still early days for gauging the impact of policy easing, job fears also appear to be restraining housing markets. Consumer sentiment towards housing has improved sharply since late last year – the index tracking responses to the ‘is now a good time to buy a dwelling?’ question has surged strongly over the last year, more than doubling from a 19yr low in February 2008 to a 7yr high in January 2009. The turnaround reflects aggressive interest rate cuts that have drastically improved affordability.
Ordinarily this would be more than enough to put a rocket under housing, especially when there is already substantial ‘pent-up’ demand in most markets due to several years of strong population growth and subdued construction of new dwellings. However, our research shows that when it comes to actual demand for houses – proxied by finance approvals – there is another critical ingredient to the consumer response: namely job security. And right now, job fears are dominating.
Our modelling suggests that positive sentiment towards housing should start to win over job fears by the second half of 2009, assuming no further deterioration in job expectations (a reasonable assumption given just how pessimistic they are at the moment). This would likely see growth in housing finance approvals rise to about 10%yr, a reasonable though not spectacular recovery.
Of course, there are other factors at play. Households have had a big hit to their net worth over the last year from slumping equity markets and moderate slippage in house prices. At the same time consumers have also become leery of taking on new debt. The combination has seen a sharp increase in the savings rate – estimated to have jumped to over 8% of income. Continued house price softness over the immediate short term will also add more pressure to net worth and weaken market sentiment towards housing insofar that it weights on expectations for future capital gains.
A fearful, debt-averse consumer is a big challenge for policy-makers. It makes generating a sustained upturn in demand much more difficult. We believe the preconditions for an upturn in housing demand are in place but that it will be slow to come through, especially while job concerns linger. With downside risks to jobs and wealth, it may also prove hard to sustain.
