Political chaos and higher mortgage rates has taken a toll on Australian households

• Australians haven't been this gloomy since late 2017, according to Westpac's consumer sentiment survey for September.

• Sentiment towards family finances, the economy, spending levels and housing all weakened. The declines among non-Labor voters were particularly severe.

• The one bright spot came from optimism towards the labour market. Australia's August jobs report will be released tomorrow.

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Political chaos in Canberra and higher mortgage rates has seen Australian consumer sentiment fall to the lowest level this year.

The latest Westpac-MI consumer sentiment index fell to 100.5 in September, a decrease of 3% from August. It now sits at the lowest level since November 2017.

A reading above 100 indicates there were more optimists than pessimists in the latest survey, albeit by a small margin.

"While the index is still in positive territory, it is now only just above the 100 level," said Bill Evans, Chief Economist at Westpac.

"The detail suggests that confidence has been affected by increases in mortgage interest rates, political instability and household budget pressures."

In particular, sentiment among coalition voters, and those who did not nominate a preference, was hammered, sliding 6.4% and 6.6% respectively. In contrast, sentiment among Labor voters improved by 4%.

Evans said the broader decline in sentiment may have been cushioned by the release of Australia's Q2 GDP report during the survey period, revealing Australia's economy grew by 3.4% in the year to June, the fastest increase in nearly six years.

“All index components recorded declines in September," he said.

"The ‘economic outlook over the next five years’ subindex registered the biggest move, a 5.8% fall. Interestingly, the mildest fall was a 0.1% dip in the ‘economic outlook over the next 12 months’ subindex, suggesting the stronger than expected June quarter national accounts may have provided some support to near term expectations.

Despite the decline in both readings, Evans said both remain higher than a year ago and comfortably above their long-run averages.

Sentiment towards current and expected family finances ahead also weakened noticeably, a reaction that appears to have been partially driven by several major banks joining smaller lenders in announcing increases to variable mortgage rates.

Both readings fell by 3.6% from August with sentiment towards current finances particularly pessimistic.

"Three of the four major banks recently lifted their standard variable mortgage rates by 14 to 16 basis points, with two of these moves announced during the survey week," Evans said.

"The decline in sentiment around family finances is broadly comparable to responses seen following mortgage rate rises in the past."

Of note, broader sentiment levels among households with a mortgage recorded a sharp 5.6% plunge in the latest survey, near double the 3% decline registered in the headline index.

Fitting with more pessimistic views towards family finances, sentiment towards whether now was a good time to buy a major household item slipped by 2.2%, leaving it at the lowest level since November last year.

"Aside from the rise in mortgage interest rates, household budgets are also coming under persistent pressure from slow growth in wages, declining house prices in Sydney and Melbourne and the rising cost of petrol," Evans said.

A recent eight-day slide in Australian stocks during the survey period may have also influenced the result, along with continued weakness in the housing market.

Sentiment towards whether now was a good time to buy a home fell 4.8%, while that towards the outlook for home prices fell by 3%, leaving it at the lowest level since December 2015.

"The index is now down 23% on a year ago," Evans said.

"Expectations have shown a particularly sharp fall in New South Wales, down 12.8% over the month and 40.6% from September last year. Most respondents in the state now believe home prices will fall in the year ahead, a mindset that could prove to be influential in the busy Spring season ahead.

Sentiment towards the outlook for prices in other states was less gloomy, especially in Queensland and South Australia. Brisbane and Adelaide are among the few capitals where median prices have increased in 2018.

Mirroring the decline in broader sentiment towards the housing market, the number of respondents who nominated real estate as the "wisest place for savings" stood at just 12%, marginally above the 8% who nominated stocks. Reflecting ongoing risk aversion from households, nearly 64% said "safe" options such bank deposits, superannuation and paying off debt were the best places to invest new savings.

Pessimism was everywhere in the latest report, except towards the labour market.

Sentiment actually improved noticeably from a month earlier, perhaps helped by unemployment falling to a multi-year low of 5.3% in July.

The unemployment expectations index tumbled 6.6% from August, leaving it down 9.6% over the past year. A lower reading indicates that more Australians believe unemployment will be lower in the year ahead.

The improvement was particularly strong in Australia's mining and semi-mining states of Western Australia and Queensland.

For the moment it remains the one bright spot for households, meaning tomorrow's August jobs report may play a crucial role in determining what happens to sentiment in the month ahead.