HOUSING JUMPS ON OPTIMISM

Consumer sentiment; Housing finance
• The consumer sentiment index has surged out of recession territory. The index rose by 12.7 per cent – the biggest monthly surge in 22 years. The index is now at 17 month highs.
• The number of new housing loans is at 14-month highs, lifting by 0.9 per cent in April. Loans for new construction rose by 1.3 per cent to stand at 5,641 – a seven year high.
• First home-buyers account for over 28 per cent of home loans taken out – the highest on record. Banks account for over 92 per cent of all loans – a 33-year high. The average loan stood at $264,700, up 11.9 per cent on a year ago.
What does it all mean?
• The sharp pick up in business confidence recorded yesterday has been mirrored in the latest consumer sentiment survey. A combination of a firmer sharemarket, super-low interest rates, a stronger Aussie dollar and most importantly, the news of Australia avoiding recession has lifted consumer spirits. For the first time in 17 months there are now more consumers who are optimistic about the future than pessimistic.
• Consumer sentiment has remained in recession territory for over a year, however consistent with the no recession story, sentiment levels have once again reached more optimistic levels. The monthly increase in sentiment was the biggest in 22 years, as confirmation that Australia had avoided a technical recession lifted sprits considerably. It all comes back to job security and if consumers start feeling that employment prospects are holding up relatively well in the current environment, optimism will follow.
• For most consumers the strength of the Australian dollar tends to signify the strength of the economy. The rally in the Aussie over the last few months will make overseas holidays and imports cheaper. Interestingly amongst respondents the “News Heard Index” on the Australian jumped from 32.9 in March to 135.4 in June.
• The latest round of housing finance figures has reinforced our view that the housing sector will be the growth driver over the next year. Overall, the total number of new housing loans is at the best levels in 14 months. A sustained improvement in activity, a significant increase in loan size and importantly a substantial jump in construction of new dwellings are all encouraging signs that rate cuts and government stimulus are working their magic.
• Government forecasts suggest domestic economic activity will remain relatively soft over the next year however we expect the pick up in housing activity will go along way to supporting growth. New construction loans have risen by a further 1.3 per cent in April following the 13.7 per cent surge in March, and are now at the highest levels in over seven years. The knock on effects to housing-related retailers can already be seen with sales of furniture, floor coverings and tiles at the best levels in over seven years.
• Prospective home-buyers are certainly finding the current conditions quite attractive and first home-buyers are taking advantage of the government’s additional boost. Over the last six months over 87,000 properties have been purchased by first home buyers – the best result in records going back 17 years.
• The concerted efforts by the government and the Reserve Bank to stimulate the economy are having the desired effect. Job security remains the one major concern for budding home buyers. If employment manages to hold up relatively well in coming months, demand for homes should gain significant momentum.
What do the figures show?
• Housing finance: The number of new owner-occupier housing loans rose for the seventh straight month in April, lifting by 0.9 per cent. The number of home loans (60,395) is at 14-month highs.
• Construction loans rose by 1.3 per cent, while the purchase of newly erected dwellings fell by 0.5 per cent. The number of new construction loans (5,641) is at seven year highs. Loans for the purchase of established dwellings rose by 0.9 per cent while refinancing rose by 0.3 per cent.
• The value of new housing commitments (owner occupier and investment) rose by 3.6 per cent in April to $21.5 billion. Investment loans rose by 8.9 per cent while owner-occupier loans rose by 1.9 per cent.
• First home buyers accounted for 28 per cent of all lending in April – the highest proportion on record (almost 18 years).
• The average loan stood at $264,700, up 11.9 per cent on a year ago. The average loan by first home-buyers fell by 0.8 per cent in April to $283,400 and stands 19.5 per cent higher than a year ago.
• Banks financed 92.3 per cent of all home loans (by value) in April – holding near 33 year highs.
• The index of consumer sentiment rose by 8.5 points or 12.7 per cent to 100.1 in June. The sentiment index is now up 18.2 per cent on a year earlier.
• The current conditions index rose by 2.2 per cent, while the expectations index surged by 20.7 per cent.
• Four out of the five components of the index rose in June.
• The estimate of family finances compared with a year ago rose by 8.1 per cent while the estimate of family finances over the next year gained by 11.1 per cent. Economic conditions over the next 12 months rose by 37 per cent while the measure of economic conditions over the next 5 years rose by 20.2 per cent
• The measure on whether it was a good time to buy a major household item fell by 1.6 per cent.
• Survey respondents believe that the wisest place to put any extra savings at present is in bank deposits (27.1 per cent of respondents), followed by paying off loans (23.2 per cent), real estate (16.1 per cent) and shares (12.3 per cent).
• The measure of wether it is a good time to buy a dwelling rose by 2.5 per cent to eight year highs, while the index of whether it is a good time to buy a car rose by 8.7 per cent.
What is the importance of the economic data?
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. Roy Morgan conducts a survey of consumer confidence. Both surveys are aggregated from responses to questions on the current and likely future state of family finances, current and likely future state of the economy and whether it is a good time to buy a major household item. Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?
• The likelihood of further rate cuts is fast being eroded. A sustained improvement in housing activity and stability in global economic conditions is likely to see the Reserve Bank remain on the interest rate sidelines in the near term.
• Investors should think long and hard about property investments. Rents are rising at double-digit rates, construction is not yet keeping pace with population (although latest signs are encouraging), interest rates are low and home prices are rising.

Source Savanth Sebastian - Economist, CommSec