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Growth in lending provides fuel to property prices

Latest housing finance data suggests that the significant expansion in home lending is fuelling the sharp rises in property prices experienced over the last few years, and especially since the second half of 2020. Despite the recession and all the disruption, in 2020, Australians wrote housing loans for $246 billion, the third highest on record.

A factor that may be as significant as the sheer size of the home lending in 2020, is the pace at which it grew. We can observe in the chart below that over almost twenty years, the pace of growth in total lending for home loans (other than refinancing), has never been as fast or sustained.



To go straight to the dashboard and take a closer look at the data, click here.


What is more, we can see that in their various ways, all the main participant groups are strong in the market. First Home Buyers (a sub-set of owner-occupiers) saw their loans at a high of $6.505 billion in December. That fed into owner-occupier loans at runaway record levels, clocking a huge and unparalleled $19.936 billion in December. Even the somewhat out-of-favour investors saw loan values leap to $6.071 billion, adding to the record total of $26.007 billion for December alone.

It is data like this that feeds into concerns about a housing bubble, and of course, the eventual and its inevitable bursting, or at least, deflation.

In the context of 2020, how did this come about?

As Greg Jericho observed in a recent article in The Guardian, when house prices fell in May 2020, there was no way government policy would allow that situation to continue. A little uncharitably, Jericho suggests homeowners (well, mortgage holders) are treated as sacred in Australia. That is sort of correct, but if it is so, it is because they play a pivotal role in consumption and growth, not to mention the employment provided by and through the housing sector.

For good or ill, since then, the HomeBuilder program and some other stimulus at the margins have been focussed on keeping house prices moving up. Part of the rationale for that is the so-called Wealth Effect discussed in the previous item in this edition of Statistics Count.

As the first chart demonstrates, all the attention is on owner-occupiers, with investor lending still fairly muted right now. That means that in addition to borrowing to build new homes (thank you first home buyers and others), established borrowers are in the market to trade up, down or sideways.

Below we can see the stellar growth – 61.1% year-on-year – in the value of loans for purchase or construction of new dwellings. This lending growth is pushing a huge amount of work into the housing pipeline, as discussed elsewhere in this edition.



To go straight to the dashboard and take a closer look at the data, click here.


With this much liquidity in the market – in total, 31% more in December 2020 than in December 2019 – for house prices, the only way is up. The growth rates on a monthly and annual basis are displayed in this next chart. Further evidence that growth in lending is at levels where normally, the RBA would step in, pull the levers and wind the economy back in. But these ain’t no normal times.


To go straight to the dashboard and take a closer look at the data, click here.


Emphasising the relationship between lending growth and house prices, Jericho provides the following chart. You would not need to be a seasoned gambler to punt on house prices continuing to expand at the current levels of lending, given the history and close correlation.




There is a complex policy web in operation right now. The RBA will not step in just because house prices are growing. For good reason, all else aside, they really do not mind the Wealth Effect being at play. What will bother the central bank is if the loans become unsustainable.

With interest rates set to remain low for the foreseeable future and unlikely to move up at all until at least late 2022 and probably until 2024, that potential driver of household capacity to cover loans is at least diminished. The improving jobs outlook will please the RBA in this context also, but the broader economic concern about the lack of growth in wages might impact its thinking over the coming year, but only if inflation is steeper than expected.

The challenge right now is to know where this level of activity might lead. Previous economic thinking would suggest on fundamentals we are in danger of entering a period of “irrational exuberance”. However, the response to COVID-19 by Government and the RBA has turned those historic models of the economy on its head. The low interest rates and the level of liquidity being pumped into the economy are unprecedented. So, if it is a bubble that appears to have the inflow and outflow of hot air within the grasp of the nation, and its wily economic regulator.


Posted Date: February 24, 2021

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