Consumer confidence wipes out two months of gains amid mortgage rate fears

Australian households have abruptly abandoned the optimism that emerged over winter, with consumer confidence falling sharply in September as expectations of another cash rate rise surged.

The Westpac-Melbourne Institute Consumer Sentiment Index dropped 5.2% to 84.4, wiping out most of the gains recorded over the previous two months and leaving sentiment near the deeply pessimistic levels seen earlier this year.

Nearly two-thirds of respondents now expect mortgage rates to rise over the next 12 months, as higher petrol prices and lingering inflation concerns revive fears the Reserve Bank may not be finished tightening monetary policy.

The turnaround marks a sharp reversal from the modest recovery in sentiment seen during July and August, suggesting households remain highly sensitive to any signs that interest rates could stay higher for longer.

Westpac said the deterioration was broad-based across households' assessments of their finances and the economic outlook, with rising fuel costs and renewed rate fears weighing heavily on confidence.

The survey's measure of family finances compared with a year ago fell 9.3%, reversing much of August's improvement, while expectations for family finances over the next 12 months also weakened.

Although inflation has eased significantly from its peak, stronger-than-expected price data has unsettled consumers and fuelled speculation the RBA could keep pressure on borrowers for longer than previously anticipated.

The bank's interest rate expectations index rose 7.3% in September, reflecting a growing conviction among households that mortgage repayments may increase again.

Housing concerns deepen

The housing market is also becoming a greater source of anxiety.

Westpac said weakening housing conditions were beginning to affect existing homeowners as well as prospective buyers, with consumer sentiment increasingly reflecting concerns about affordability and borrowing costs.

The "time to buy a dwelling" index fell 10.7% in September, unwinding much of August's improvement and leaving buyer sentiment about 25% below its pre-pandemic average.

While expectations for house prices were little changed during the month, they remain well below levels recorded a year ago, suggesting households remain cautious about the outlook for residential property.

Consumers are also pulling back on discretionary spending. The "time to buy a major household item" index fell 4.8% and remains almost 30% below its pre-pandemic average.

Job worries start to emerge

The survey also pointed to a growing unease about employment prospects.

The unemployment expectations index rose 2.8% during the month, indicating more Australians expect joblessness to increase over the year ahead.

Those concerns were particularly pronounced among workers in the construction and hospitality sectors, according to Westpac-Melbourne Institute, highlighting fears that slower economic activity could begin flowing through to the labour market.

Australians favour cash over property

The survey's quarterly "wisest place for savings" question suggested households are adopting a more defensive stance towards their finances.

Around one-third of respondents nominated bank deposits as the best place to save their money, while support for real estate remained near historic lows at just 4.7%.

The results point to a growing preference for safety and liquidity as households contend with uncertainty around interest rates, inflation, and economic growth.

Despite easing inflation and a labour market that has so far remained relatively resilient, consumer confidence remains entrenched in pessimistic territory.

At 84.4, the index remains well below the neutral level of 100, where optimists and pessimists are evenly balanced, and is around 9% lower than at the start of the year.