Confidence in housing picked up by 3.3% with the Index now at its highest level since January 2010, as a result of modest recent falls in house prices improving affordability. The uptick comes as overall consumer sentiment in Australia plummets to its lowest level in two years.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell to a reading of 92.8 points in July in seasonally adjusted terms from 101.2 points in June.

Westpac chief economist Bill Evans said a special question associated with this survey showed that a majority of respondents still expect house prices to rise rather than fall although that majority has shrunk noticeably since the same question was asked in April.

“Recognition that houses have become a little more affordable might improve sentiment but concerns that prices may fall further are likely to continue to restrain households’ buying intentions,” Mr Evans said.
The Reserve Bank Board next meets on August 2. On July 27 the Inflation Report for the June quarter will print.

According to Westpac, it was the release of the much higher than expected inflation read for the March quarter on April 27 which motivated the Bank to move from a neutral bias to the strong tightening bias that was announced in its Statement on Monetary Policy on May 6.

“In our experience the language associated with that bias indicated an imminent move.

“Of course that has not happened and as global financial markets continue to deteriorate and, as demonstrated in this Report, household nervousness intensifies the Bank is very likely to move back to its neutral bias,” said Mr Evans.

Westpac does not expect that the Inflation Reports for the remainder of the year will change that stance. Markets are now pricing in a likely 25 bp rate cut in the near future.

“We saw in 2008 that despite three consecutive reads of 1.2,1.2 and 1.1 for quarterly underlying inflation the Bank still flipped from a tightening bias in May to a 25 bp rate cut in September followed by 100 bp’s in October.

“As such we do not expect to see a change in rates for the remainder of this year, with an easing bias the most appropriate policy response to the current economic circumstances,” Mr Evans said.