The Westpac-Melbourne Institute Index of Consumer Sentiment had fallen from highs in November and December on the back of consecutive rate rises from the RBA and today’s reading may be a contributing factor in another rise next month.

“This is a very strong result,” Westpac’s Chief Economist, Bill Evans, commented. “The Index is seasonally adjusted and therefore takes account of traditional January optimism.

“Nevertheless it is still above its level of last September prior to the Reserve Bank’s record three consecutive rate increases over the three months from October to December.

“In other convincing evidence that households appear to have comfortably absorbed the higher interest rates we note that the confidence of those respondents who currently hold a mortgage has reached its highest level since 1994 when we first collected data using categories defined by home ownership. These categories of the Index are not seasonally adjusted but suffice to note that the rise in the confidence of those respondents with a mortgage was up 16.7% in January compared to the average rise in January of 8.6%.”

Strong jobs data, with the unemployment rate now likely to have peaked, was considered by analysts as the major reason for the sentiment improvement, with consumers reporting higher job security.

Assessments of “Family finances compared to a year ago” increased by 5.2%; expectations about family finances “over the next 12 months” increased by 10.5%. Expectations for “Economic conditions over the next 12 months” rose by 6.8%, although expectations for “economic conditions over the next 5 years” fell by 2.1%.

“The evidence from this survey; the labour market; and recent trends in retail sales indicates that the Bank will be keen to move monetary settings back to a level where interest rates are no longer stimulatory for the economy,” Mr Evans advised. “A recent speech from an RBA official indicated that such a level for their overnight cash rate might be expected to be around 4.5% compared to the current 3.75%.

“Accordingly we expect to see another rate hike of 0.25% to be announced by the Bank on February 2 with the likelihood of another two increases of 0.25% each by June.”

Expectations for Own Business Conditions, Sales and Profitability are now at their highest levels since October 2007, a sign of growing confidence in the economy. Future expectations of National Economic Conditions, Climate for Investment and GDP Growth are also at their highest since this survey began in 1998, while hiring intentions rose.

The survey also gauges the sensitivity of investment to various constraints. Three successive official interest rate hikes, coupled with some major lenders increasing their lending rates by more than the official rate rise, ‘Charges by Lending Institutions’ has risen from the ninth to the seventh largest impediment to business investment and Level of Interest Rates has edged up from the twelfth to the tenth constraint. Such rising funding concerns led the investment expectations index into negative territory once again.

“Overall the survey has highlighted that trading conditions and business confidence have improved further over the December quarter, based on further signs of global and domestic economic recovery,” Greg Evans, Director of Economics and Industry Policy, ACCI commented. “Nevertheless, actual conditions, sales and profitability continued to fall short of prior expectations. Weak investment indicators also suggest that businesses remain pessimistic about their business capital expenditure plans in the first half of 2009. Therefore to ensure sustainable economic recovery, it is imperative that fiscal and monetary policy settings continue to encourage productive business investment and jobs creation.”

The Newspoll survey found that 86 per cent of Australians have never ordered a copy of their own credit report, even though they are legally entitled to a copy, while D&B data shows there will be a dramatic jump in the number of consumers contacted by debt collectors in February and March relating to credit they obtained over the Christmas and New Year period.

Dun & Bradstreet CEO Christine Christian believes Australian consumers have been poorly educated and served when it comes to understanding their credit profile and the consequence is credit choices that can have a long lasting negative impact.

“Consumers are generally unaware how their credit report works and have almost no idea about how to get a copy,” said Ms Christian. “This lack of understanding often creates confusion as consumers end up with credit products that are more expensive than they expected but they don’t understand why. Often it’s because of information on their credit report which they could have known about before applying for credit.”

The scheme is set to replace the present state-based system of consumer credit protection, which operates inconsistently across the eight jurisdictions. It will reduce the likelihood of families who can’t meet their debts losing their homes and give ASIC greater regulatory power in the consumer credit sector.

“The guidance sets out how ASIC will approach the administration of the National Consumer Credit regime,” a statement from ASIC advised. “It has been developed to help industry prepare their credit licence applications and also understand ASIC’s expectations in relation to their obligations as credit licensees.

“Separate guidance has been developed to specifically assist small business operators make a credit licence application. We have also updated regulatory guides on applications for relief and when we will issue no-action letters under the National Credit Act.”

The registration process commences on April 1 next year, with the National Consumer Credit regime to commence in July.

“We will continue to work with people likely to be affected by the new requirements as part of our commitment to achieving a smooth transition for industry,” ASIC Commissioner Dr Peter Boxall added.

To find out more please visit: www.asic.gov.au/ASIC/asic.nsf/byHeadline/09-262AD ASIC releases guidance for credit licensees?opendocument.

The researchers noted that the industry had systemically changed in Australia, but saw numerous opportunities in the year ahead. They cautioned, however, that this year’s growth rate – below 10% for the first time in a decade – may become more common.

“This means that the days of outstanding system lending growth of between 10-15% p.a. are over. We anticipate current lending growth levels of around 7.5% are most likely to remain into the near future,” said James Hickey, a banking partner with Deloitte Actuaries and Consultants.

Informed by a roundtable of Australian mortgage lenders and distributors, the Deloitte Australian Mortgage Report considers the challenges and opportunities for the industry in 2010 across competition, margins and credit performance, product design and distribution.

“The overarching sentiment is one of renewed hope,” Hickey advised. “In 2010 lenders will seek to position for the opportunities ahead. Where 2009 was the year of the major banks, 2010 will provide opportunity for the re-emergence of other lenders in the marketplace.”

“The Big Four roundtable participants said they would welcome more competition and the smaller lenders said they intend to tackle them. So the game is on,” according to Graham Mott, Audit Partner and Deloitte Australian Securitisation lead.

To meet the challenges ahead the roundtable and Deloitte’s analysis show that the evolution of the mortgage market is likely to take place on a number of fronts:

* Differentiation around brand, strategy, pricing and operating models
* Competition between the Big 4, from regional and non-bank lenders, and other ‘left field’ industry players
* Distribution channels indicating continued M&A activity in 2010 of third party broker groups, and natural attrition driven by regulation
* Innovation around product design, customer service, delivery channels and operating efficiency, where leveraging technology and mining and understanding data will be key.

“The consensus of the industry players was that a return of the residential mortgage backed securities (RMBS) investors was both necessary and anticipated,” Mott noted. “We are already seeing solid evidence that the RMBS market is returning and at this rate it will reach ‘break even’ levels in 2010 – triggering the environment for more competition.”

Mr Mott added that all industry participants expressed concern as to the possible ‘double whammy’ of higher unemployment and rising interest rates in 2010 and its effect on arrears. But, despite the challenging credit conditions, their current losses were remaining stable – helped by the unexpected decline in unemployment.

Housing market

The researchers noted that supply constraints would help fuel the property market in the year ahead, negating the impact of stimulus reduction.

“Housing demand currently exceeds supply, and although fuelled to large extent by the boost to the first home buyers grant, lenders and distributors anticipate that will be replaced by growth from investor lending in 2010 and so continuing a settlement growth rate of 5-10%,” Hickey explained.

The report suggested that non-bank lenders – hit hard by the global financial crisis – would begin to make inroads once again next year.

“Non bank lenders are optimistic and the market is anticipating their return in 2010,” Hickey said. “While the major lenders positioned themselves well during the GFC in terms of strategic acquisitions and capabilities, they will now increasingly compete on price, strategy and service. This, together with a continued demand for distribution by third party brokers, means the outlook for 2010 will be one of competition, greater choice and differentiation.”

The Melbourne Institute Household Financial Conditions Index, which shows the proportion of households who are saving relative to the proportion of households who are running into debt and/or drawing on their savings, grew for the fourth consecutive quarter.

“The Household Financial Conditions Index increased by 1.9 per cent in the December quarter,” Dr Michael Chua, a Research Fellow at the Melbourne Institute, advised. “In the December survey, the proportion of respondents nominating ’saving for a rainy day’ as their prime motivation for saving, fell to 43.8 per cent compared to 48.1 per cent a year ago. Superannuation is the second most popular form of investment asset, with 66.8 per cent of households indicating that they hold this type of asset.

“This is lower than the 75.3 per cent result in September, and 69.6 per cent a year ago.”

The sentiment reading enhances the prospect of strong business spending in the coming months and is likely to further reduce pressure on the unemployment rate.

According to the NAB index, business confidence in November rose 3 points to an index reading of +19, its highest since May 2002. The gains were led by the retail, mining and transport sectors, with construction and wholesale sectors the laggards.

Researchers labelled the data a “remarkable outcome”, although cautioned that it may lead to further upward pressure on interest rates.

The annual forecasting survey by Australian Business Economists (ABE), released this week, shows expectations of the cash rate steadily rising toward 4.75 per cent by the end of 2010, before climbing a little further in 2011. Currently, the cash rate stands at 3.75 per cent – 0.75 per cent off its lows after three consecutive monthly hikes. Interest rates remain well below the peak of the last cycle, however, when the cash rate surged to 7.25 per cent in 2008.

“A few committee members felt that a higher cash rate was appropriate,” Chairman Stephen Halmarick said upon releasing the survey, according to the AAP. “Those that believed this were the ones that generally had a higher median forecast for economic growth and/or inflation in 2011.”

The median forecast for GDP growth in 2009 was 1.2 per cent, rising to 2.6 per cent in 2010 and a robust 3.5 per cent in 2011. This growth would be helped by a lack of unemployment pressure, with economists expecting the unemployment rate to peak at 6.2% (it currently stands at 5.8%). Indeed, it appears that even this may be pessimistic given recent data although Thursday’s jobs figures will provide a clearer picture.

“The stimulus to the consumer has passed, while the stimulus in the form of infrastructure and capital expenditure would add to the productive capacity of the economy in the long run,” Mr Halmarick added.

The quarterly survey began in 1993 and provides the latest snapshot of small and medium enterprise (up to 199 employees) business activity in Australia.

Report author Ms Christena Singh said there had been another quarter of growth in business confidence, albeit at a slower rate than the previous two quarters.

“Following two very strong quarters of growth, business confidence has risen more moderately this quarter,” she advised. “Overall, this equates to a strong turnaround from the record low level of business confidence we saw in February this year.”

“Business confidence is now at the highest level in Australia since August 2007.”

The building and construction; communication, property and business services; and transport and storage sectors are particularly bullish about their business prospects over the next 12 months. However, confidence remains low in the manufacturing sector.

Business confidence has improved in all states and territories, with the exception of the Australian Capital Territory which recorded a fall and South Australia, where it remains stable.

In line with improved business confidence, perceptions of the current state of the Australian economy improved and are now at the highest level since November 2007.

“Importantly, both small business sentiment and actual business performance improved this quarter,” Ms Singh said. “In the early phase of the economic recovery, we saw business optimism streak ahead, while trading conditions remained at historically low levels.”

“This quarter we have seen business’ perceptions and their actual performance moving more in sync.”

Trading conditions have been strongest for the finance and insurance sector, with the highest sales and profitability results for the second successive quarter. The retail trade sector has experienced the weakest trading conditions.

Demand for goods and services strengthened further during the quarter, with the sales indicator hitting its first positive reading since February 2008.

Profitability improved again this quarter to be at the highest level since February 2008. Ms Singh noted that while the profitability indicator overall was still in negative territory, it was significantly higher than this time last year.

The finance and insurance sector experienced the strongest profitability, while the weakest profitability was experienced in the retail trade sector.

After a strong result last quarter, capital expenditure was the only performance indicator to fall (down from +3 to -9).

However, Ms Singh cautioned that, despite the positive results for the quarter, small businesses did not expect the coming quarter to be as strong.

“Small businesses overall are expecting demand and profits to be down on the previous quarter, but remain well above the low levels experienced during the economic downturn.”

The accommodation, café and restaurant sector is expecting the weakest conditions, while retailers are expecting the registers to ring strongly over the key Christmas trading season.

In seasonally adjusted terms the number of private sector houses approved rose 5.0% in October 2009, while the total number of dwellings approved fell 0.6% – mainly driven by a large fall in other residential dwellings (-17.9%). New South Wales (-10.3%) and South Australia (-4.4%) recorded the largest falls in the total number of dwellings approved.

The value of total building approved fell 7.2% in October. Falls occurred in non-residential building (-14.4%) and residential building (-0.2%) . The value of alteration and additions to residential property rose 0.3% to $537.9m, again proving the RBA’s point that housing investment is not waning but merely being more commonly redirected toward upgrades rather than new homes.

The Chief Economist at the Housing Industry Assocaition, Dr Harley Dale, said that building approval levels currently implied around 145,000 housing starts per year, well short of the new homes required to meet Australia’s rapidly growing population.

“It is encouraging to see signs of a new home building recovery, but then after five years of trend decline in residential construction you would certainly hope to be seeing some evidence of a turnaround,” he stated. “We are, however, looking at a moderate rather than strong lift in new home building in 2010. This disappointing outlook will remain in play until such time as credit constraints on medium and high density developments are eased and until supply side obstacles including inequitable taxation of new housing and re-emerging land supply shortages are effectively tackled.”

“In the meantime an acute shortage of new housing stock will persist, generating undue pressure on rents and on existing home values.”

The number of seasonally adjusted residential dwelling approvals increased in October by 10.5 per cent in Tasmania, 9.7 per cent in Western Australia, and 4.2 per cent in Queensland. Approvals dropped by 10.2 per cent in New South Wales and were down by 4.5 per cent in South Australia and 0.3 per cent in Victoria.