Is Australia About to Hit Hard Times?

The so called “lucky country,” Australia, is about to experience some harsh times. We have seen consumer sentiment erode sharply which does not paint a nice picture of the future.

Australia’s benchmark, the S&P/ASX, has dropped eight percent since September. The market has been weighed down by poor global economic sentiment, a falloff in commodity prices and Australia’s red hot property market. We have seen investor sentiment collapse across the board in the down under. Investors are worried about financial conditions and when they will deteriorate further.

These concerns were very evident in the Fitch ratings survey, released this past Wednesday. The housing market is a big slice of the pie in Australia’s confidence so when there are issues here or with wages, sentiment will drop off sharply and there is a red hot property market. Housing prices are up 9.3 percent over the last year as we have had 15 months of low interest rates. We have seen prices in Sydney soar 14.3 percent. Same for Melbourne. This has caused great concern with the Reserve Bank of Australia (RBA) who have threatened new regulations to curb this expanding bubble.

Looking at the Westpac-Melbourne Institute and their consumer sentiment report, pessimists have far outweighed optimists for eight months in a row. We have seen a slight pickup of confidence, but the pessimists are still running the show. To make matters worse, business conditions continue to deteriorate as the index fell, again in September, to its lowest level in four months. The expanding real estate bubble, which could soon burst, as well as stagnant wages caused sentiment here to sour. However, most responders were happy with macroeconomic indicators as 79 percent, do not expect the unemployment rate to rise above 6.5 percent anytime soon.

There have been major concerns the unemployment rate would grow further after rising to 6.4 percent in July. Since then the jobless rate has fallen back to 6.1 percent as of September.

There is a bright spot here. A light at the end of the tunnel, so to speak. A fall in investor sentiment could become a buying opportunity for the country’s stocks. This collapse in consumer confidence could be a signal that we are at or near the floor in the country’s benchmark stock index. This could be the contrarian’s favorite sign to jump in while prices are low.

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