Consumer confidence cracks under interest rate pressure – realestate.com.au

The recent decline in interest rate expectations is the catalyst for the lowest sentiment among consumers in more than fifteen months.

The Westpac-Melbourne Institute’s latest Consumer Sentiment Index shows that around two-thirds of those with a view now expect mortgage rates to rise by 2026.

The index takes into account how borrowers feel about the short- and medium-term economic prospects, the timing of spending decisions and how their household finances compare compared to 12 months ago.

While confidence is higher than during the post-Covid crisis on the cost of living, Matthew Hassan, head of Australian macro forecasting at Westpac, said sentiment had fallen significantly since the last index in September.

For the first time since October 2024, there are more pessimists than optimists in every component of the index, with all sub-indexes trading below 100.

“The main catalyst remains a sharp turn in interest rate expectations,” Hassan said.

Borrowers faced a sharp turnaround in cash rate forecasts after truncated average inflation hit a year-over-year high, according to the Australian Bureau of Statistics’ full-year inflation data.

Headline inflation came in even higher at 3.2%, meaning both figures are now back outside the Reserve Bank’s all-important 2-3% target, which largely determines the path of cash rates.

ABS’s new monthly range was even higher, with an annualized rate of 3.8% in the 12 months to October, and 3.4% in the 12 months to November.

This led some analysts to believe that the RBA’s next rate hike would be an increase, and that August’s cash rate cut to 3.60% may have been premature.

Governor Michele Bullock said after the central bank meeting in December that the possibility of rate hikes in 2026 had been discussed.

The Westpac index now shows that almost two-thirds of consumers expect mortgage rates to rise over the next 12 months, more than double the share of those who felt this way in September.

The Westpac-Melbourne Institute Mortgage Rate Expectations Index also rose a further 5% in January.

The index, which tracks consumer expectations for a variable mortgage rate over the next twelve months, is now at its highest level in 2.5 years.

“At the time, 68% of consumers expected mortgage rates to rise,” says Hassan. “Just over 64% share the same opinion today.”

Westpac expects no change in cash rates at the upcoming Reserve Bank meeting on February 3, anticipating an extended ‘hold’ period lasting the rest of this year.

“The recent strong inflation figures and an increase in domestic spending have clearly raised concerns that inflation is not yet fully under control,” said No Hassan.

“The RBA’s monetary policy board is sensitive to this risk and has set the stage for potential rate hikes, should they be necessary.”

It is hoped that a weaker labor market will ease demand pressures on goods and services, allowing borrowers to feel the positive effects of cooling inflation later this year.

Reserve Bank Governor Michele Bullock is expected to announce another rate cut next month. Photo: News Corp Australia

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On the housing front, the index noted that house price expectations have cooled in January, but are still positive.

According to the latest PropTrack Home Price Index, the national home price rose 0.1% in December, reaching a new record.

The average price of a house in Australia is currently $880,000 – $82,200 more than a year ago.

Mr Hassan noted that while homebuyer sentiment had improved marginally in January, it remains “pessimistic” overall.