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Share of first-time home buyers hits 6-year highsHousing finance; Reserve Bank speech
Number of home loans: The number of loans (commitments) by home owners (owner-occupiers) rose by 2.2 per cent in October – the largest gain in 15 months. But loans are down by 4.8 per cent on the year.
First home buyers active: The proportion of first-time buyers in the home loan market rose from 18.0 per cent in September to 6-year highs of 18.1 per cent in October (decade-average 17.7 per cent).
Speech from Reserve Bank official: Reserve Bank Assistant Governor (Financial Markets) Christopher Kent delivered a speech at the Bloomberg event in Sydney: “US monetary policy and Australian financial conditions”. Following the speech the Assistant Governor fielded questions from the audience, reiterating that “…the next move in interest rates is likely to be up, but not anytime soon.”
What does it all mean?
Much is being made of the release of yesterday’s OECD report entitled “Australia’s cooling housing market; is the economy at risk?”. In its conclusion, the OECD says that Australia’s “house prices could fall more substantially” and “should this happen, household consumption could weaken….weakened aggregate demand could in turn lead to losses on loans to businesses, putting stress on the financial sector.”
While a ‘hard landing’ in the Sydney and Melbourne housing markets could pose a risk to Australia’s financial stability and economic outlook, this does not appear to be the OECD’s base case scenario. In fact, it was only last month that the Paris-based institution forecast that Australia’s “robust economic growth is set to continue” with annual GDP growth forecasts of 2.9 per cent in 2019 and 2.6 per cent in 2020, respectively.
And the OECD has stressed that “so far, data point to a soft landing without substantial consequence for the overall economy…banks are well capitalised and their liquidity position is sound. Indebtedness is concentrated in middle- and high-income households, and data indicate declining financial stress in recent years, despite rising mortgage debt. Moreover, many mortgage holders have accumulated substantial buffers of advance payments.” 
And today’s housing finance data surprised to the upside, suggesting that the regulator’s “engineered slowdown” could potentially lead to a ‘soft’ rather than ‘hard’ landing for Aussie housing activity. The number of home loan approvals for both owner-occupiers and investors lifted. Together, it was the strongest growth rate in loan approvals in 15 months. And the value of loans rose too.
First home buyers continue to be more active, attracted by more affordable home prices with their proportion of total home loans at six-year highs. And the average home loan size lifted a little, suggesting that some buyers are still gaining access to sizable home loans, despite tighter lending standards by banks and a slowdown in approval processing times.
What do the figures show?Housing finance – number
The number of loans (commitments) by home owners (owner-occupiers) rose by 2.2 per cent in October – the largest gain in 15 months. But loans are down by 4.8 per cent on the year.
Excluding refinancing, new loans rose by 2.3 per cent in October – the strongest growth rate since July 2017.
Loans by owner-occupiers for the construction of homes rose by 3.2 per cent in October, rebounding after falling by 2.9 per cent in September and 6.0 per cent in August.
Loans to buy newly-erected dwellings fell by 0.6 per cent in October after a 4.2 per cent decline in September.
Loans for the purchase of established dwellings (excluding refinancing) rose by 2.4 per cent – the largest increase in 15 months.
The number of refinancing transactions rose by 1.9 per cent in October.
Changes in home loans across the country: Victoria (up 5.1 per cent), South Australia (up 7.1 per cent), the Australian Capital Territory (up 10.1 per cent), Tasmania (up 8.7 per cent), Queensland (up 0.8 per cent) and New South Wales (up 0.3 per cent). Falls were recorded in the Northern Territory (down 10.3 per cent) and Western Australia (down 0.4 per cent).
Housing finance – value
The value of new housing commitments (owner occupier and investment) rose by 2.6 per cent in October to be down 8.6 per cent on the year.
Owner-occupier loans rose by 3.5 per cent in October. Investment loans rose by 0.6 per cent – the first increase in two months. Over the year to October, investor loans are down by 17.9 per cent and owner-occupier loans have fallen 3.2 per cent.
The value of loans by owner-occupiers and investors to build new homes rose by 6.5 per cent in October to $2.84 billion to be down 14.0 per cent on the year – the largest annual decline in 7½ years.
Housing finance – other statistics
The value of cancelled loans totalled $1.29 billion in October, marginally up from $1.28 billion a year earlier.
Commitments actually advanced (loans made) totalled $19.8 billion in October, the same as a year earlier.
The proportion of first-time buyers in the home loan market rose from 18.0 per cent in September to 6-year highs of 18.1 per cent in October (decade-average 17.7 per cent).
The proportion of fixed rate loans rose from 14.6 per cent in September to 16.3 per cent in October – the strongest growth rate in 12 months.
And the average home loan across Australia rose from $383,900 in September to $386,300 in October, up by 2.2 per cent on the year.
Reserve Bank speech: “US Monetary policy and Australian financial conditions”
Reserve Bank Assistant Governor (Financial Markets), Christopher Kent, basically focused on rising borrowing costs for Aussie lenders as the US central bank lifts interest rates towards “neutral” (that is, where rates are at a level that neither stimulates nor restrains US economic growth).
On financial conditions: Mr. Kent emphasised that the link between monetary policy settings in Australia and the US is “neither direct nor mechanical”, however, “the primary channel through which foreign interest rates influence Australian conditions is through the exchange rate. An increase is policy rates elsewhere will, all else equal, tend to put downward pressure on the Australian dollar, because capital is likely to be attracted to the higher rates of return available abroad.” And “in the period ahead it seems plausible that term and credit risk premia will rise, which will increase costs for all borrowers, Australian banks included.”
On interest rates, jobs and inflation: In the Q&A session following the speech, Mr. Kent said “What we’ve been saying for a while now is we’re making some progress on bringing down the unemployment rate and lifting the inflation rate, but it’s gradual, so the next is likely to be up, but not anytime soon.” But he was keen to reiterate the Board’s policy stance remained data dependent, “We’ve said that it’s likely the next move is up – but it doesn’t mean that if it’s needed the next move might not be down, but that’s not our forecast, which are for, I’d emphasise, a gradual fall in unemployment and gradual rise in inflation, so that’s why the next move is likely up.”
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?
The OECD has warned that risks of a “hard landing for the Australian housing market remains…past OECD work has found that soft landings are rare.” And “[Australian] authorities should prepare contingency plans for a severe collapse in the housing market”. So today’s housing finance data release will be greeted with some relief by Australian policymakers.
The number and value of home loans lifted in October and there were gains in the key components of established dwellings, refinancing, new construction and first home buyer lending. And lending activity lifted in New South Wales and Victoria, despite falling home prices.
It is important to remember that home lending has soared over the past few years and the current slowdown is both overdue and healthy, for the reasons identified by the OECD. Also, most Aussie home owners have been warned that borrowing costs for lenders are increasing, implying that standard variable mortgage rates may lift further. It appears that indebted households are diligently paying down their mortgages in advance, building buffers.
In 2019, the Reserve Bank will remain data-dependent with its policy settings. In a perfect world it would like to normalise interest rates from record low levels. As always, the jobs market remains key to the monetary policy outlook, given the desire to see wages growth increase sufficiently to lift inflation. But this is countered by uncertainty around the political, housing and consumer outlook. Therefore, a continued period of interest rate stability looks likely.
Published by Ryan Felsman, Senior Economist, CommSec