Through most of 2011 and the beginning of this year, the Australian economy has been hobbled by sentiment, writes Mark Bouris
Through most of 2011 and the beginning of this year, the Australian economy has been hobbled by sentiment. Sentiment is so important for key measurements such as growth and employment. But sentiment is very hard to measure or put a value on.
In my business, we get a good feel for sentiment because the people we deal with are usually making serious decisions and they talk about why they are making them. And the feeling over the past 18 months has been marked by uncertainty, caution and a reluctance to commit.
When you're running a household or a business and you have to juggle rising costs of living with employment concerns, new taxes and constant reports of a European crisis, it's understandable that people have lost their confidence.
The Westpac Melbourne Institute Index of Consumer Sentiment has been running very low this year. The June Index showed Australians were 1.7 per cent less confident last month than they were in October 2011, despite interest rate cuts since then totalling 125 basis points.
So it was with a glimmer of optimism that I saw two signs this week of perhaps a small turnaround in sentiment.
Firstly, we saw positive house value data creeping back into the numbers. Home values rebounded one percent in June, according to RP Data-Rismark. Sydney, Melbourne and Brisbane each rose 1.0 per cent; Perth and Canberra boasted a 2.0 per cent increase. Hobart reported the biggest rise for June at 2.7 per cent
It was a welcome mini-comeback for house values after the all-capital cities index fell -1.4 per cent in May.
It suggests that the two interest rate cuts from the RBA in May and June have at least given some impetus to the genuine buyers who have been holding off.
The second sign I saw this week was from the Australian Bureau of Statistics' Building Approvals for May 2012.
It showed a rebound in apartment building approvals, up 45 per cent on approvals in May 2011. The downside was that approvals for houses had gone backwards by -7.7 per cent.
So the fact that the RBA held the cash rate at 3.5 per cent last week, along with the small bounce in some housing numbers, creates a sense that we might be at the bottom of this real estate market. With rates on hold after two cuts, and house values improving slightly, we could be a good time to buy.
It's also a good time to refinance: since 1990 the official interest rate has only been lower than 3.5 per cent between February and October 2009. So whatever is happening in China or Europe, this is a low-interest rate era of history. Which is good for buyers and good for mortgage holders.
There is nothing wrong with waiting for the bottom of the market and low interest rates. But it isn't caution I worry about - it's inaction caused by fear.
A comeback in sentiment will start when enough people see a depressed real estate market as a good time to buy, rather than evidence of doom.
Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on firstname.lastname@example.org with any queries you may have or check www.ybr.com.au for your nearest branch.
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