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The Westpac-Melbourne Institute Index of Consumer Sentiment, based on a survey of 1,200 respondents, fell by 5.6 per cent in May to its lowest level since August 2020, at 90.4 points, down from its previous 95.8 in April.
Rising costs of living and the prospect of rising interest rates had spooked consumers, Westpac reported, with the 5.6 per cent monthly fall being the largest since a 6.9 per cent drop in June 2015 (excluding pandemic-related shocks).
The survey had taken place over the week when the Reserve Bank of Australia (RBA) hiked the cash rate to 0.35 per cent.
Consumers were seen to be “bracing for a steep rise in interest rates”, the report from Westpac chief economist Bill Evans stated.
“Our May survey found 77 per cent of respondents expect mortgage interest rates to rise over the next 12 months, up from 70 per cent last month,” the report said.
“But it is even more significant that 52 per cent expect rates to rise by more than 1 per cent, up from just 34 per cent only one month ago.”
Not surprisingly, the prospect of rising rates was observed to weigh heavily on confidence in the housing market.
The “time to buy a dwelling” index, which had already plummeted by 40 per cent from its most recent peak in November 2020, fell a further 1.5 per cent in May.
The index, which Westpac noted reflects housing affordability, reached its lowest level since April 2008, when the RBA raised rates and the global financial crisis was looming.
The Westpac Melbourne Institute Index of House Price Index expectations also fell by 9.4 per cent to 121.41.
“Most respondents still expect house prices to rise over the next year – indicated by an index read over 100,” Mr Evans wrote.
“The latest read compares to the consistent sub-100 prints seen in 2018 and 2019 when house prices were correcting by 12-15 per cent in the Sydney and Melbourne markets.”
Westpac also noted a sharp rise in concern about the near-term outlook for family finances, with its dedicated sub-index (family finances, next 12 months) tumbling by 11.2 per cent to 93.3 points.
“The prospect of rising interest rates is clearly weighing on respondents despite the prospect of higher bank deposit rates,” the RBA stated.
The “economy, next 12 months” sub-index had also declined by 5.8 per cent to 90.4, while the “economy, next five years” sub-index fell by 4.1 per cent to 96.2.
Westpac meanwhile expects multiple increases through the remainder of the year, with the cash rate tipped to peak at 2.25 per cent in May 2023.
But Mr Evans wrote that his team would favour a June rate lift of 40 bps rather than the 25 bps indicated by RBA governor Philip Lowe when he explained the rate rise, when he stated the board was concerned with returning to “business as usual” for monetary policy.
“Such a move [raising by 40 bps] would swiftly remove the 65 bps of rate cuts which were implemented during 2020 at the height of the COVID emergency,” Mr Evans stated.
The Reserve Bank recently lifted its forecast for underlying inflation in 2022 from 2.75 per cent to 4.75 per cent and is now aiming to lower the rate back down to 3 per cent by mid-2024.
“That requires more than a ‘business as usual’ approach,” Mr Evans argued.
“The point at which interest rates become a damaging drag on the economy is unknown but it is prudent to balance the need for policy to catch up with the surety that rates are currently well below that inflection point. Leaving any catch-up moves to later in the cycle risks over-shooting that point.”
[Related: Westpac mortgage book rises despite investor slip]
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