The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 3.8 per cent to 113.8 in December from 118.3 in November.
Westpac’s Chief Economist Bill Evans said it is a surprisingly modest fall given recent interest rates rises.
“We expected that there was a real possibility that the index would fall much more sharply than the 3.8 per cent which it has registered,” said Evans.
“Note that after the RBA tightened by 25 bps in March 2005 the variable mortgage rate was increased to 7.3 per cent from 7.05 per cent and the index fell by a massive 15.5 per cent. Each subsequent increase in mortgage rates over the course of 2006 and 2007 generally saw ‘double digit’ falls in the index. With households now holding even more debt relative to their incomes we expect that we must be getting close to levels of the variable mortgage rate where households will become much more sensitive than is currently the case.
“A closer inspection of the components of the index shows that those folks holding a mortgage have responded much more negatively to the rate increases than those who are not holding a mortgage. Confidence amongst those with a mortgage fell by 8.9 per cent while confidence of those who are renting actually increased by 1.6 per cent while those wholly owning their homes registered a fall of 4.1 per cent.
“Other positive factors are clearly supporting the confidence of those households who are not borrowers. The share market rose by 2.4 per cent; the Australian dollar was slightly higher; and petrol prices were broadly stable (up by 0.7 per cent). However, encouraging news on the labour market was probably the most important offset to the news on interest rates,” he said.
Following the increase of 40,000 jobs in September it was reported that a further 25,000 new jobs had been created in November despite market forecasts for job losses.
All components of the index fell in December although the assessment of current conditions (down by 2.1 per cent) was more resilient than expectations (down 4.9 per cent).
Responses on Family finances compared to a year ago (down 1.9 per cent); whether now is a good time to buy a major household item (down 2.3 per cent) and the five year economic outlook (down 1.4 per cent) were all quite modest falls. Households are more concerned about the near term. Responses on Family finances over the next 12 months (down 6 per cent) and economic conditions over the next 12 months (down 7.2 per cent) were both much weaker.
However, retailers should derive considerable comfort from the relatively modest fall of only 2.3 per cent in the ‘time to buy a major household item’ component.