Sentiment will win the battle……but fundamentals will win the war

Westpac and the Melbourne Institute measure consumer confidence (sentiment) every month. The most recent measurement in October 2020 was interesting to say the least. The collapse in confidence that occurred in March 2020, predominately as a result of COVID-19, may now be somewhat of a distant memory. As the chart below demonstrates, confidence was higher in October 2020, than it was in October 2019, and even October 2018.

Source: Westpac and Melbourne Institute

From a property market perspective, any uplift in consumer sentiment typically coincides with an improvement in auction clearance rates. It was therefore no surprise to see that CoreLogic’s auction clearance rate chart for October 2020, see below, also demonstrated a recent uplift in activity.

Source: CoreLogic

What makes this really intriguing, is that property price performance historically correlates strongly with auction clearance rates, as evidenced by the chart below from CoreLogic and Macro Business.

Source: CoreLogic & Macro Business

There is no denying that consumer sentiment, and therefore the property market, have benefited strongly from recent government stimulus programs like JobKeeper and JobSeeker. The reality is, the positive impact of such stimulus programs on consumer sentiment may level out as changes to the support provided inevitably take place.

This recent market behaviour just reaffirms the fact that sentiment is a fickle beast; it can come and go like the latest trends in fashion. Consequently, it is often stated that, “sentiment may win the battle (short term), but fundamentals will win the war (long term)”.

This is exactly why investing in property should be focussed on market fundamentals. Where the supply and demand equation will remain favourable into the future. Property with the right fundamentals benefits when consumer sentiment is high, but more importantly, it remains resilient when confidence also becomes compromised.

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