Consumer sentiment falls 3.8% in December

The Westpac-Melbourne Institute Index of Consumer sentiment has been rattled after three consecutive rate rises, falling 3.8 per cent in December from 118.3 in November to 113.8.

Bill Evans, Westpac chief economist, said that this fall was surprisingly a lot smaller than expected.

“This is a surprisingly modest fall in the Index given recent developments on interest rates. We expected that there was a real possibility that the Index would fall much more sharply than the 3.8%,” he said.

“Note that after the RBA tightened by 25 basis points in March 2005 the variable mortgage rate was increased to 7.3% from 7.05% and the Index fell by a massive 15.5%. Each subsequent increase in mortgage rates over the course of 2006 and 2007 generally saw double digit falls in the Index.”

Although the entire index witnessed a decrease for the month, Evans highlighted that those consumers without a mortgage actually became more confident after the rate rises.

“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,” he said.

“Confidence amongst those with a mortgage fell by 8.9%, while confidence of those who are renting actually increased by 1.6%. Consumers who own their own homes registered a fall of 4.1%.”

According to the report, all components of the index fell in December with the assessment of current conditions down 2.1 per cent, family finances compared to a year ago down 1.9 per cent, whether now is a good time to buy a major household item fell 2.3 per cent and the five year economic outlook dropped 1.4 per cent.

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