The latest Westpac-Melbourne Institute Consumer Confidence Index further declined 2.4% to 82.4 in early-April, a two-year low.

The latest figure indicates a deepening consumer gloom that’s prevailed since the index fell below the neutral mark of 100 in March 2022; a below-100 index means pessimists outnumber optimists. 

Outside the early 1990s recession, this is the second most protracted period of deep consumer pessimism since the survey began in mid-1970s. 

Sentiment slumps in the past lasted nine months or less. 

“The April sentiment update suggests consumers continue to expect progress on inflation and associated cost-of-living pressures to be slow,” Westpac senior economist Matthew Hassan said. 

“Previous sentiment slumps have typically come from shocks to growth that did not have this inflation dimension, [and] they ended more quickly as policymakers were able to respond more quickly.” 

Consumers continue to bear the brunt of rising prices, and although the consumer price index has been easing over the recent months, it remains above the 2-3% target of the Reserve Bank of Australia (RBA). 

High interest rate dampens homebuying activities

With inflation proving stickier than expected, the higher-for-longer cash rate weighs on households especially those with mortgages.

Despite major economists fully priced for rate cuts to begin as early as September, consumers remain unconvinced such a thing would happen this year.  

The Mortgage Rate Expectations Index, which tracks consumer expectations for variable mortgage rates over the next 12 months, revealed over 40% are still bracing for interest rate increases and only 21% expect declines. 

In turn, consumers are postponing their homebuying plans, as the ‘time to buy a dwelling’ index fell 3.2% to 75.3 in the first week of this month.

Buyer sentiment sharply fell in South Australia (down 14%) and Queensland (down 10%).

The Board will meet on 6-7 May with no expected change on the official cash rate. 

“The Bank’s latest commentary shows it is becoming a little more comfortable that further rate rises will not be required but it is not yet confident enough about the inflation outlook to consider the case for rate cuts,” Mr Hassan said. 

The minutes of last month’s policy meeting revealed the RBA did not consider the case for rate hikes for the first time since May 2022. 

Members of the Board noted that monthly inflation, excluding volatile items, had dropped below 3% on a three-month-ended annualised basis. 

Whatever their next move will be, the March quarter CPI update due 24 April will be key to shaping the RBA’s views. 

And if the forecast that inflation will drop within the 3-4% range materialises, Mr Hassan believes “that should give the Bank more confidence that it will achieve its target in 2025, allowing for more positive message at its May Board meeting – something that would provide some comfort for Australia’s embattled consumers”.

More Aussies sign on new home loans

Despite high mortgage rates, more Australians took out new home loans in February.

The latest ABS lending indicators data released on Monday showed the total value of new loan commitments rose 1.5% to $26.4 billion, bouncing back from two consecutive drops of 3.9% in January and 4.1% in December. 

Owner-occupier lending was up 1.6% to $16.9 billion month-on-month, while investor loan commitments increased by 1.2% to $9.5 billion. 

Economists forecast the lending figures will “continue to grow in the coming months” off the back of rising sales volumes and improving borrowing capacity. 

“As wages grow, inflation slows, and tax cuts start, borrowing capacity should rise, supporting loan size growth,” ANZ senior economist Blair Chapman said.

Mr Chapman likewise expects refinancing activity, which rose 3% in February, to normalise “as rates stabilise and the fixed rate roll-off broadly comes to an end in 2024”.

First home buyer loan commitments up, new home lending down

Interestingly, lending to first home buyers remained steady despite affordability constraints, rising 5.8% to $4.93 billion. 

“Average loan size for first home buyer owner-occupiers continues to trend higher dwelling price growth, but the number of loan approvals compares reasonably favourably to the pre-pandemic environment,” NAB senior economist Taylor Nugent noted.

It appears the higher mortgage rates and affordability constraints are being offset by tightness in rental markets, coupled with an underlying strength in housing demand.

Over the past year, the number of first home buyer loan commitments went up 13.2%. 

The upbeat activity among first-time homeowners may be likely influenced as well by the increase in housing prices, with 70% of consumers expecting dwelling values to continue to rise. 

Beneath the increases, lending for the purchase and construction of new homes remained at its lowest level in more than two decades.

“Lending to build and purchase a new home remained 3.6% lower in the three months to February 2024 than at the same time last year,” noted Tim Reardon, senior economist at the Housing Industry Association (HIA). 

“This is a deeper and more sustained downturn in lending for home building than any other period observed in the past 20 years,” he added. 

According to Mr Reardon, the low level of lending is consistent with other leading indicators of home building activity such as new home sales and building approvals, “which continue to signal an ongoing slowdown in the volume of homes commencing construction”.

New dwellings approved for construction fell 1.9% to 12,520 in February – well below the 20,000 average monthly run rate of approvals required to meet the government’s target of building 1.2 million homes in five years. 

While first home buyers soldier on in the current high-interest-rate climate, new home lending folds. 

“The rise in the cash rate is the primary cause of this poor result in new home lending,” Mr Reardon said.

“Higher interest rates are compounding the impact of the rise in the cost of construction caused by elevated land, labour, and material prices.”

Photo by Mart Production on Pexels