Sentimental politics

From Challenger Chief Economist Dr Jonathan Kearns

The 400 basis point increase in the RBA’s cash rate, and consequentially in mortgage rates, has put home borrowers under significant financial pressure. You might expect this to make mortgaged households more pessimistic compared to households that own their home outright (i.e. have no mortgage). However, surveyed consumer sentiment for households that own their home outright has fallen almost as much as for those with a mortgage. The survey combines questions on personal financial situation, anticipated economic conditions and buying conditions for major items.

Historically there is essentially no relationship between the level of interest rates and the difference in sentiment of owner and mortgaged households. For those statistically minded, a regression of the difference in sentiment on the RBA cash rate has a statistically significant coefficient, but the share of this difference in sentiment explained by the cash rate (the R-squared) is less than 0.2%.

Similarly, even though rents have increased significantly (rents on new rentals have risen by over 40% since early 2021 and average rents by 15%) the fall in sentiment for households renting has been just as large as for households that own their home outright. Historically there is a slightly stronger, but still very weak, relationship between the rate of rent growth and the difference in sentiment between outright owners and renters. A regression of the difference in sentiment on rent growth in the CPI has an R-squared less than 4.7%.

One area where there is a significant divergence in consumer sentiment is based on what political party the individual supports. When the Coalition is in government, individuals who support the Coalition have much higher sentiment than to those who support the Labor party. If the Labor party wins the election, the sentiment of Labor and Coalition supporting individuals flips. While the jump was less stark with the 2022 election than in previous elections, it’s notable that differences in sentiment haven’t anticipated changes in Government, sentiment only changes after the election. When it comes to consumer sentiment, it seems politics dominates everything.