Record housing wealth

Consumer confidence remarkably steady

Consumer confidence; CBA HSI; Home prices; Reserve Bank Board minutes

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.4 per cent to 100 points – the lowest level since May 25 2014. Sentiment is below both the average of 114 points held since 2014 and the longer term average of 113.1 points since 1990. The measure of economic conditions over the next 12 months (‘current economic conditions’) fell by 9.3 per cent to a record low of –37.8 points.

Home prices: The Bureau of Statistics reports that Australian home prices rose by 3.9 per cent in the December quarter (the biggest lift in 3 years) to stand 2.5 per cent higher over the year. The total value of residential dwellings in Australia was at a record high $7,212.6 billion in the December quarter.

CBA Household Spending Intentions (HSI): According to the Commonwealth Bank (CommBank), “The fallout from the bushfires and coronavirus is becoming clearer in the sharp drop in spending intentions for travel and education.”

Reserve Bank interest rate cut: Minutes of the March 3 Board meeting were released. Board members said: “it was appropriate to ease monetary policy further in response to the global COVID-19 outbreak to provide additional support to employment and economic activity.”

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Home price data is important for retailers, especially those focussed on consumer durables. The Reserve Bank Board minutes provide guidance on interest rate settings.

What does it all mean?

• Aussies are living through extraordinary times. Our lives are currently being disrupted as governments and health authorities desperately attempt to contain the outbreak of the deadly coronavirus (COVID-19). The health crisis has the potential to impact the vulnerable – our parents, grandparents and the sick – with many of us already ‘social distancing’ and ‘self-isolating’ by working from home. Of course, as we’ve already seen in China, the containment measures can have a huge impact on jobs, consumer spending, supply chains and business activity.

• According to a special Roy Morgan ‘snap’ SMS Survey of 1,148 Australian businesses, released yesterday, over 60 per cent of Aussie businesses now report being affected by COVID-19, up by 45 percentage points from a month ago. And “81 per cent of ‘Small Businesses’ with an annual turnover of between $1-$5 million report being affected by COVID-19 – higher than businesses of any other size”. The most affected sectors include: Recreation & Personal (83 per cent); Manufacturing (78 per cent), Information Media & Telecommunications (75 per cent) and Property & Business Services (74 per cent).

• Consumer sentiment hit fresh 5½-year lows last week. Somewhat surprisingly the decline – just 0.4 per cent – was more modest than expected, probably supported by the economic stimulus package. And the Aussie dollar hit fresh 11½-year lows of around US60.80 cents today. But the headwinds confronting the economy remain ‘front of mind’ for most Aussies with views on ‘current economic conditions’ at record lows.

• One area of the economy displaying resilience is the housing market. In fact, housing wealth hit record highs at the end of last year. But the residential building slowdown was evident, however, with annual growth of the number of homes falling to 5-year lows in the December quarter.

• Despite escalating concerns about COVID-19 and public gatherings, CoreLogic reported a preliminary nationwide auction clearance rate of 70.6 per cent last weekend. While there are downside risks to housing activity over the coming weeks and months, clearance rates of 70-75 per cent were recorded in the buoyant Sydney and Melbourne property markets. And CoreLogic reported that “auction volumes increased week-on-week across the smaller markets of Adelaide, Brisbane, Canberra and Tasmania.”

What do the figures show?

Consumer sentiment – Week ended March 15 2020

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.4 per cent to 100 points – the lowest level in 5½ years. Sentiment remains below both the average of 114 points held since 2014 and the longer term average of 113.1 points since 1990.

• Three of the five major components of the index fell last week:

The estimate of family finances compared with a year ago was up from +4 points to +7.1 points;

The estimate of family finances over the next year was down +17.8 points to +17.2 points;

Economic conditions over the next 12 months was down from –31.4 points to –37.8 points;

Economic conditions over the next 5 years was up from +2.7 point to +4.9 points;

The measure of whether it was a good time to buy a major household item was down from +9.1 points to +8.9 points.

• The measure of inflation expectations was fell from 4.1 per cent to 4 per cent.

Residential property prices – December quarter

• The Bureau of Statistics (ABS) has released its Residential Property Price indexes for the December quarter.

• The price index for residential properties for the weighted average of the eight capital cities rose by 3.9 per cent in the December quarter – the biggest lift in 3 years – to be up 2.5 per cent from a year ago.

• In the December quarter, capital city residential property price indexes rose in Melbourne (up by 5.2 per cent), from Sydney (up 4.7 per cent), Canberra (up by 3.1 per cent), Hobart (up by 2.7 per cent), Brisbane (up by 1.8 per cent), Adelaide (up by 1.4 per cent) and Perth (up by 1.1 per cent). But prices fell in Darwin by 0.8 per cent.

• Over the year to December, residential property prices rose in Melbourne and Hobart (both up by 4.1 per cent), followed by Sydney (up by 3.7 per cent), Canberra (up by 1.9 per cent), Brisbane and Adelaide (both up by 0.3 per cent). But prices fell in fell in Darwin (down by 5.5 per cent) and Perth (down by 2.5 per cent).

• The total value of residential dwellings in Australia was a record high $7,212.6 billion in the December quarter, increasing by $294.4 billion or 4.3 per cent over the quarter.

• The mean price of residential dwellings rose by $25,400 to $661,000 and the number of residential dwellings rose by 43,400 to 10,437,900 in the December quarter.

• CommSec estimates that the number of people per home was steady, around 2.45 in the December quarter.

• The value of all dwellings in Australia in the December quarter was 6.2 per cent higher than a year ago. Over the year, the value of homes was higher in NSW (up by 8.2 per cent), Victoria (up by 7.6 per cent), Tasmania (up by 5.4 per cent), ACT (up by 4.8 per cent), Queensland (up by 3.7 per cent), South Australia (up by 1.7 per cent) and Western Australia (up by 0.9 per cent). But home values were lower in the Northern Territory (down by 1.2 per cent).

• The number of homes in Australia fell by 7,400 in the December quarter to be up by 173,500 over the year – the slowest growth in five years.

The Commonwealth Bank (CBA) Household Spending Intentions Series (HSI): February

• On home buying intentions: “Home buying intentions remain elevated but spending intentions more generally eased back in February.”

• On retail spending intentions: “Retail spending intentions remain soft. The fundamental driver is weak income growth. But the bushfires, smoke and coronavirus are all clearly taking a toll.”

• On travel spending intentions: “Travel spending intentions have stepped down sharply in recent months. The February travel HSI readings are the lowest since the series began in 2015. The key driver is, again, the bushfires and coronavirus.”

• On health & fitness spending intentions: “The general resilience in spending intentions for health & fitness has taken a hit in recent months.”

• On entertainment spending: “The other ‘experience’ segment to show a pullback in spending intentions is entertainment. Nevertheless, spending intentions in this segment are still rising.”

• On education spending intentions: “CBA transactions data reveals that spending declines in areas associated with universities and colleges (due to the negative effects of the coronavirus) is partly offset by higher spending on correspondence schools.”

• On motor vehicle purchase intentions: “The HSI readings for motor vehicles showed a distinct turn up in spending intentions late in 2019. And this lift continued in January and February.”

Reserve Bank March 3 Board meeting minutes

• Decision to cut rates: “The Board concluded that it was appropriate to ease monetary policy further in response to the global COVID-19 outbreak to provide additional support to employment and economic activity.”

• On the outlook for monetary policy: The Reserve Bank Board “was prepared to ease monetary policy further to support the Australian economy.” And, “it was reasonable to expect that an extended period of low interest rates would be required.”

• Impact of COVID-19 on the Australian economy: (i) Trade: “growth in Australia’s major trading partners was expected to be around ½ percentage point lower in 2020 as a result of COVID-19”; (ii) On education and tourism sectors: “a significant effect on the Australian economy, particularly in the education, transport and tourism sectors.”; (iii) On consumer spending: “The uncertainty associated with the outbreak was also likely to affect household spending and business investment in coming months. As a result, GDP growth in the March quarter was likely to be noticeably weaker than previously expected.”

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

• The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.

• The focus of the Commonwealth Bank (CBA) Household Spending Intentions Series (HSI) is on Australian households and their spending intentions. The approach is to employ the near real-time spending readings from CBA’s household transactions data, combine them with relevant search information from Google Trends data and map the results to the official data on consumer spending.

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• Policymakers around the world are confronted with the most serious health crisis in decades and are increasingly ‘throwing the kitchen sink’ at the global economy to prevent a prolonged and painful recession. In the past 24 hours, central banks have responded aggressively to stresses in financial markets – mostly credit and funding market related – by cutting interest rates to near zero, announcing large-scale purchases of government bonds and mortgage backed securities, lower rates on currency swaps, repo operations and regulatory relief for banks.

• Overnight, European Union finance ministers announced fiscal measures averaging 1 per cent of GDP 2020, focusing on containment and treatment of the virus. Liquidity facilities of at least 10 per cent of GDP have also committed, consisting of public guarantee schemes and deferred tax payments.

• In the US, National Economic Council Director Larry Kudlow said the Trump Administration “might” provide direct cash assistance to US households. And New York Senator Chuck Schumer will reportedly propose a stimulus package of at least US$750 billion to the US Congress.

• Today, the New Zealand Government announced a NZ$12.1 billion (4.1 per cent of GDP) virus package focused on increased welfare payments and wage subsidies for affected businesses.

• Australia’s Federal government is also reportedly preparing to upscale its $17.6 billion fiscal stimulus package – a support for consumer confidence – as it seeks to shield Aussie businesses and jobs from the impact of COVID-19. And the NSW government plans to stimulate the state economy with spending increases and tax cuts worth about $2.3 billion.

• Attention now turns to a speech by Reserve Bank Governor Dr. Philip Lowe on Thursday at 4pm. Dr. Lowe is widely expected to cut interest rates to a record low 0.25 per cent and announce a series of measures to keep borrowing costs low. Policy initiatives expected include government and semi-government bond purchases (that is, quantitative easing or QE), yield curve targeted and coordinated fiscal/credit measures with the major banks.

• The Aussie dollar is doing its part – acting as a shock absorber during a crisis – and is widely expected to fall below US60 cents in the coming days.

Published by Ryan Felsman, Senior Economist, CommSec