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Home lending nearing peak levels?

Article courtesy of Craig James, Chief Economist, CommSec

Housing Finance

  • The number of home loans (commitments) for people who want to live in them (owner-occupiers) fell by 0.9 per cent in August. Excluding the refinancing of dwellings, the number of loans was down by 1.9 per cent.

  • The value of all home loans (investment and owner-occupier) fell from record highs in August, down by 1.2 per cent to $2.80 billion.

  • The share of first-time buyers in the market fell from 12.2 per cent in July to a record low of 11.8 per cent in August. The average home loan across Australia stood at a six-month low of $318,400 in August, but this was still up 6.1 per cent on a year ago.

The housing finance data has implications for construction firms, home improvement retailers, employment and broader economic growth.

What does it all mean?

  • Interest rates are at record lows and we haven’t been building enough homes to house our growing population. So it is hardly a surprise that demand for homes is at record highs. But high prices are inducing some caution by those buying homes with the intention of living in them. And investor housing activity is also expected to soften as record approvals to build new homes eventually translate to more homes on the market for either rent or for sale.

  • Housing is always a function of demand and supply and the coming lift in new supply will lead to slower growth of home prices and reduced interest by investors.

  • First home buyers are staying on the sidelines. In part this reflects choice – more young people prefer to rent near capital cities rather than buy in the suburbs. And some of the new investors are actually first home purchasers – they are buying with the purpose of renting the properties out, rather than living in the homes themselves. It is a brave new world in the housing markets – something that many analysts and journalists are still getting their heads around.

What do the figures show?

  • The number of new owner-occupier housing loans (commitments) fell by 0.9 per cent in August. Excluding the refinancing of dwellings, the number of loans was down by 1.9 per cent.

  • The number of loans by owner-occupiers for the construction of homes fell by 0.8 per cent in August – the second consecutive fall. The value of construction loans fell by 1.2 per cent in August after a 2.7 per cent fall in July.

  • The number of loans by owner-occupiers to buy newly-erected dwellings rose by 2.5 per cent in August and the value of loans rose by 5.8 per cent.

  • The number of loans by owner-occupiers for the purchase of established dwellings (excluding refinancing) fell by 2.6 per cent in August but the value of loans fell by 3.4 per cent.

  • The number of refinancing transactions by owner-occupiers rose by 1.1 per cent in August to a 6-year high while the value of transactions fell by 1.3 per cent.

  • The value of new housing commitments (owner occupier and investment) was down 1.2 per cent with owner-occupier loans down 2.0 per cent while investment loans fell by 0.1 per cent.

  • The value of loans by owner-occupiers and investors to build new homes rose from $2.36 billion to $2.49 billion in August.

  • The proportion of first-time buyers in the home loan market fell from 12.2 per cent in July to a record low of 11.8 per cent in August. First home buyer loans remain well below the long-term average of 20.0 per cent. Fixed rate loans rose from 13.7 per cent to 14.5 per cent of all loans in August. And the average home loan across Australia stood at a six-month low of $318,400 in August, up 6.1 per cent on a year ago.

What is the importance of the economic data?

  • Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

  • There are few signs as yet that housing demand is easing. But over the next 12-18 months, more homes will be on the market for rent and sale. The Reserve Bank must just remain watchful about the macroeconomic effects in a year or so when investors are having difficulty in letting properties and have to offer significant incentives to budding renters.

  • The Reserve Bank isn’t in a rush to lift interest rates, nor should it be. Increased home construction is supporting economic growth and higher home prices are supporting wealth, consumer sentiment and consumer spending

Important Information

The summary and attached report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

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