Lockdowns hit consumer confidence and home sales

Consumer confidence; Home sales

What happened? The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.4 per cent in August to an 11-month low 104.1. All five major components of the index fell. The biggest falls in sentiment were for para-professionals and tradies (-15.2 per cent), sales and clerical workers (-13.3 per cent) and those aged 18-24 years (-10.5 per cent). Confidence plunged 12.5 per cent in Melbourne and was down 3.9 per cent in Sydney.

Implications: We expect ASX-listed retailers to report strong performance for financial year 2021, but we caution that many companies will be unwilling to provide earnings guidance for the year ahead due to lockdown uncertainty. Investors will retain a laser-like focus on key issues: the sustainability of the retailer’s gross margin expansion and operating leverage; how supply chain issues are being managed; and balance sheet management.

Other economic data: In seasonally adjusted terms, private new detached home sales plunged by 20.5 per cent in July to 4,646 units. Sales fell most in Victoria (-32.2 per cent) but lifted in Western Australia (+8.5 per cent).

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The home sales data has implications for banks, retailers, developers, building and building material companies.

What does it mean?

• Consumer sentiment, as measured by Westpac and the Mebourne Institute, dropped by 4.4 per cent in August to an 11-month low of 104.1 points. But the number of optimists (above 100 points) still outweighs the number of pessimists, despite the 12.4 per cent plunge in sentiment since the 11-year high in April. The measure of unemployment expectations worsened by 13.7 per cent in August to a 9-month high of 124.6 points. And all five major components of the index declined – focusing on consumer views on their finances, spending and the economy.

• Of course, consumer confidence varies by region, occupation, age and sex. In August, the biggest fall in sentiment occurred in Victoria (-10.8 per cent), followed by NSW (-4.1 per cent) and Queensland (-4.0 per cent) as the Covid-19 delta variant spread, resulting in shutdowns. Confidence dropped in both lockdown-wary Melbourne (-12.5 per cent) and Sydney (-3.9 per cent). But sentiment rose in relatively ‘delta-free’ South Australia (+9.1 per cent) and Western Australia (+4.1 per cent) with Tasmania broadly flat (-0.5 per cent).

• By demographic group, the biggest falls in consumer sentiment in August, include: those aged 18-24 years (‑10.5 per cent); home owners with no mortgage (-7.6 per cent); para-professionals and tradies (-15.2 per cent); sales and clerical workers (-13.3 per cent); retirees (-5.8 per cent); the unemployed (-5.0 per cent); males (-5.7 per cent); females (-2.9 per cent); and those earning $40,000-$60,000 (-10.0 per cent).

• On the flipside, sentiment increased most for the following consumers in August: tenants (+0.7 per cent); labourers/operators (+23.2 per cent); and those earning $20,000-$40,000 (+2.9 per cent) and $60,000-$80,000 (+3.7 per cent).

• August is going to be huge month for ASX-listed retailers with JB Hi-Fi, Coles and Super Retail Group scheduled to report their earnings next week. Woolworths and Wesfarmers provide their results the week after, before Harvey Norman rounds-out the month. We expect retailers to report strong performances for financial year 2021, but we caution that many companies will be unwilling to provide earnings guidance for the year ahead due to lockdown uncertainty.

• So what are some of the near-term themes that investors should look out for? When observing trading updates for financial year 2022 we expect retailers to be cautious given the uncertain economic outlook due to the Covid-19 delta health crisis. Much will depend on government policies and immunisation rates, but expect similar trends in shopping to last year’s nationwide lockdown with continuing strong demand for online electronics goods. And with Aussies confined to their homes, sales of food and liquor at local shops should remain buoyant, supporting the earnings of grocery chains. Many households have already upgraded the interior of their houses, but renovation activity will likely continue to strengthen hardware store sales. Purchases of non-essential apparel may ebb due to work-from-home arrangements.

• Elevated and refreshed inventories could support gross margin expansion for retailers when compared to pre-pandemic levels in 2019, before easing in next few years. And investors will be looking for an improvement in supply-chain management by companies, despite border closures, product shortages and freight limitations. Operating leverage has been managed through higher sales, reduced spending, lower occupancy costs, Aussie dollar tailwinds and conservative balance sheet management.

• The Melbourne-Westpac consumer sentiment gauge shows that the ‘time to buy a dwelling’ index hit the second lowest level since 2010 in August at 88.9 points. Rapid home price growth has reduced housing affordability and lockdowns have likely reduced physical home viewings and sales. According to the Housing Industry Association, new home sales plunged 20.5 per cent in July. Further deterioration in consumer confidence, due to lockdowns and rising unemployment, could moderate home prices and sales.

What do you need to know?

Consumer confidence – August

• The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.4 per cent in August to an 11-month low of 104.1. The survey was taken over the period August 2-7.

• All five major components of the index fell in August.

Of the sub-components, the ‘time to buy a dwelling’ index fell by 8.3 per cent in August. The ‘house price expectations’ index eased by 1.6 per cent. And the ‘unemployment expectations’ index jumped (worsened) by 13.7 per cent in August.

New home sales – July

• In seasonally adjusted terms, private new detached home sales fell by 20.5 per cent in July to 4,646 units. But sales for the three months to July still remain 4.3 per cent higher than in the same period in 2018.

• The Housing Industry Association (HIA) reported, “With lockdowns in multiple states restricting trade and eroding confidence, it is not surprising that fewer people were able to visit display homes.”

• And, “The solid level of sales following the end of HomeBuilder suggests that demand for detached housing remains robust despite the poor result in July.”

• Western Australia was the only state to see an increase in new home sales in July, up by 8.5 per cent. But sales fell in NSW (‑14.8 per cent), Queensland (-25.4 per cent), South Australia (-29.4 per cent) and Victoria (-32.2 per cent).

• HIA said, “This month’s sample captures 23 per cent of Australia’s new detached home building sector.”

• No data was published by the HIA for multi-unit sales.

Published by Ryan Felsman, Senior Economist, CommSec