Younger Aussies stare down Omicron

Consumer confidence; Building activity

• The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2 per cent to a 16-month low of 102.2 in January. But sentiment – for surveyed Aussies aged 18-24 years – hit a 13-month high of 121.6.
• The total number of dwelling starts fell by 16.3 per cent – the biggest drop in 21 years – to 56,617 units in the September quarter of 2021. But starts are still up by a massive 30.8 per cent on the year.
• The value of residential and commercial building work in the pipeline stood at a record $112 billion at the end of September 2021, up by 25.3 per cent on a year ago.

What does it all mean?

• Consumer sentiment, as measured by Westpac and the Melbourne Institute, fell by 2 per cent in January to a 16-month low of 102.2 points. Sentiment is down by 4.5 per cent on a year ago, but the number of optimists still outweigh the number of pessimists, with the index above its long-run average of 101.4 points.
• Concerns about the spread of the Omicron virus variant and record surge in new Covid-19 cases, which has strained supply chains, weighed on household sentiment at the beginning of 2022. That said, Westpac economists noted, “The 2 per cent decline compares to the 5.2 per cent drop seen in the first month of the delta outbreak in NSW, a 6.1 per cent drop heading into Victoria’s ‘second wave’ outbreak in 2020 and the epic 17.7 per cent collapse when the pandemic first hit in early 2020.” Confidence amongst Aussies aged 18-24 years old hit a 13-month high of 121.6 points in January.
• And consumers in the states of NSW and Victoria, which endured lengthy Delta virus lockdowns last year, “appear to have been less unsettled by the rapid spread of the Omicron variant than those in states experiencing their first major wave of COVID infections,” according to Westpac economists. In January, confidence increased in NSW (up 1.7 per cent) and Victoria (up 4.1 per cent) with sentiment higher in both Sydney (up 2 per cent) and Melbourne (up 4.6 per cent) in sign of consumer resilience, after enduring Australia’s longest pandemic lockdowns in the past two years.
• But sentiment deteriorated in states experiencing their first major wave of infections, led lower by Tasmania (down 8.9 per cent), South Australia (down 3.9 per cent) and Queensland (down 2.7 per cent). And relatively “Covid-free” state Western Australia saw sentiment plunge 5.1 per cent, despite shutting its borders to all other states and territories.
• Three out of the five major components of the index decreased in January, with measures of consumer views on ‘economic conditions, next 12 months’ sub-index dipping 9.6 per cent and the ‘economic conditions, next five years’ sub-index down 6.1 per cent. But consumer views on ‘family finances versus a year ago’ jumped by 7.5 per cent, perhaps due to the ‘wealth effect’ of rising home prices and sharemarkets in 2021 alongside elevated excess savings. And consumer spending intentions improved in January, with the measure of whether it is a ‘good time to buy a household item’ lifting by 2.8 per cent.
• Of course, Australia’s housing market remains a key focus for households in early 2022. Home price gains are slowing, with the CoreLogic Home Value Index up by just 1 per cent in December, the slowest growth in 11 months. Unsurprisingly, the Westpac-Melbourne Institute ‘time to buy a dwelling’ index rose by 6.3 per cent in January, but the ‘house price expectations’ index eased by 4.8 per cent. In fact, Westpac economists reported that in January, 55 per cent of survey respondents expected mortgage interest rates to rise over the next 12 months, the highest proportion since February 2018.
• Australia’s residential home building sector has been a strong performer during the pandemic, supported by record-low interest rates, HomeBuilder grants, state and territory government incentives and excess savings. With more people working from home during the pandemic, household spending on building new homes and renovating old ones has boomed
• But data released today by the Bureau of Statistics (ABS) shows that residential construction was soft in the September quarter of 2021. Construction work was shutdown in both NSW and Victoria with reduced workforces allowed on building sites, due to Covid-19 Delta virus government lockdowns.
• Total house starts dipped by 16.5 per cent in the September quarter to 35,827 units – the biggest drop in 21 years – but were still up by a massive 30.7 per cent from a year ago. And total apartment starts fell by 15.8 per cent to 20,539 units, but were 31 per cent higher on a year ago.
• The value of residential and commercial building work in the pipeline, however, stood at a record $112 billion at the end of September, up by an incredible 25.3 per cent on a year ago. Across Australia, 224,251 homes were being built at the end of September, not far-off the record 229,351 homes built in March 2018.
• Leading indicators of housing show that demand for new detached homes remains strong. The value of all residential and commercial building approvals stood at a record $146.1 billion in the year to November. In the same month, the value of renovation loans hit a record $569 million. And the number of loan approvals for new construction rebounded by 5.5 per cent in November – the first increase in 8 months – after the HomeBuilder expiry.
• The boom in detached buildings is expected to continue in 2022, but rising fixed mortgage rates, slow population growth, tighter macroprudential controls and less government policy stimulus, will likely slow the frenetic pace of residential construction in the back end of the year.
• In fact, with construction industry capacity already stretched, and a sizeable pipeline of work already locked-in, with backlogs amid lockdown disruptions and worker absenteeism, further project delays are expected to constrain home building activity from elevated levels.

What do you need to know?

Consumer confidence – January

• The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 2 per cent to a 16-month low of 102.2 in January, down 4.5 per cent on a year ago. The survey was taken over the period January 10-13, 2022.
• Three of the five major components of the index fell in January.
•   Of the other key sub-components, the ‘time to buy a dwelling’ index rose by 6.3 per cent in January. The ‘house price expectations’ index eased by 4.8 per cent. And the ‘unemployment expectations’ index lifted (deteriorated) by 8.2 per cent in January.

Dwelling starts & work done – September quarter 2021

• The total number of dwelling starts fell by 16.3 per cent – the biggest drop in 21 years – to 56,617 units in the September quarter of 2021. But starts are still up by a massive 30.8 per cent on the year.
• Total house starts dipped by 16.5 per cent to 35,827 units – also the biggest drop in 21 years – but were still up 30.7 per cent from a year ago. And total apartment starts fell by 15.8 per cent to 20,539 units, but were 31 per cent higher on a year ago.
• Work started on 227,809 new dwellings over the 12 months to September, up by 30.6 per cent on the year – the strongest annual growth rate in 11 years. But starts are down from record highs of 234,440 dwellings in the year to June 2016.Across states and territories, starts in the September quarter: NSW (down 23.3 per cent); Victoria (down 2.9 per cent); Queensland (down 28.2 per cent); South Australia (down 14.8 per cent); Western Australia (down 18.4 per cent); Tasmania (down 12 per cent); Northern Territory (down 63.6 per cent); and the ACT (down 34.3 per cent).
• In the September quarter, the value of residential and commercial building work done fell by 1.6 per cent, but was up 3.5 per cent on a year ago. New residential work dipped 2.6 per cent, but alterations & additions rose 7.8 per cent and commercial building fell by 2.3 per cent.
• The value of residential and commercial building work in the pipeline stood at a record $112 billion at the end of September, up by 25.3 per cent on a year ago.
• Across Australia, 224,251 homes were being built at the end of September, down from a record 229,351 homes in March 2018.