Australian
Consumer Interest Rate and House Price Expectations
Charlie Nelson
director foreseechange
July 2003
Both interest rates and house prices affect consumer activity. Interest rates affect both consumption and investment decisions. The Reserve Bank of Australia has shown that housing wealth boosts consumption by three cents for every dollar rise.
Consumer expectations about interest rates and house prices are likely to influence activity too. For example, if house prices are expected to rise, this may boost consumption in anticipation. Also, expected changes in house prices will influence decisions by both home owners and investors. Expected movements in interest rates would certainly influence investment decisions and may affect consumption decisions.
Now there is tracking data on interest rate and house price expectations. This data is not made publicly available in the newspapers, by the Reserve Bank, or any other organisation. It can only be obtained from foreseechange by subscription. Subscribers will, therefore, have an advantage over their competitors who do not subscribe.
These measures will be updated every two months from now on, with a view to monthly measurement from 2004. Over time, we will analyse the relationship between these expectations measures and consumer activity.
Subscription costs $180 (plus 10% GST) for a 12 month period, during which at least six updates will be provided. The July update is available immediately.
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Interest rate expectations have been measured since late 2001 (Chart 1). Interest rate expectations shifted dramatically when the Reserve Bank increased the cash rate in May 2002. But despite strong words at the time about the likelihood of future rises, expectations of a rise gradually diminished. The July reading is now available to subscribers and indicates the shift in expectations since the Reserve Bank signaled the next move may be down – but did not deliver in July.
The first measure of house price expectations was in May 2003 (Chart 2). Most consumers expected continued rises in house prices. For those expecting a rise, the average expected rise was 6.3%. For the minority who expected a fall, the average fall was 6.5%. The net expected rise in house prices was 2.8% over the next six months. The July reading is now available to subscribers and indicates the shift in expectations since the Reserve Bank signaled the next move may be down.
Chart 1
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