It is inevitable that, when new dwelling approvals are skyrocketing, lending activity will also be climbing. That is why there is only a little surprise that Australia’s lending finance is fast heading towards record levels. The total value of lending finance commitments has continued to climb, with first home buyers starting to lose out to investors, in a market where, by any objective measure, prices are going off the planet.
That is not to say it is all gloom and doom for first home buyers. Their demand has been met by supply in this recent stimulus-fuelled boom, and it could be that the demand is beginning to wane. They were still around 24% of the total in February, borrowing AUD 6.880 billion of the total AUD 28.640 billion, for example. But that was 4.0% lower than the prior month, while investor loans were up 4.5% to AUD6.940 billion.
Overall, February saw the first dip in Owner-Occupier loan commitments in almost a year, but most of this was down to first home buyers, as set out above.
As a measure of underlying ‘value’ in the housing market, it is useful to examine the annual percentage change in the total value of loans. The second chart provides some stark realisations when we consider that total annualised borrowings are more than 48% higher than they were a year earlier. Most of that is the value of new dwelling commitments, and some is in the value of higher-priced properties, secured at low interest rates and financed, in part, by reduced household expenditure during lockdowns.
Drilling into these details a little further… we can see in the third chart that, in February, the majority of commitments were for new loans for construction by owner occupiers. Those loans reached AUD 3.653 billion for the month, while the newly built owner occupier loans came in at AUD 1.237 billion. Both were up markedly on always quiet January, but are below the peaks reached in December.
Investor loans for the same purposes were up also, as the chart shows. Both new builds (AUD 538 million) and newly built (AUD 405 million) beat the January numbers but were below the peaks reached in December.
Perhaps the latest data points to the beginning of some cooling of new commitments, but if anecdote is anything to go by, March may have been another big month of growth in the lead up to the end of the HomeBuilder program.
Despite the mutterings about the need for mortgage lending rules to be reconsidered in the light of the big spike in house prices that this data implies, there doesn’t seem to be much official concern about the state of lending finance, although the watching brief is as eagle-eyed as a fire tower officer on a hot, windy day.
CoreLogic’s Eliza Owen wrote that one measure – the proportion of interest only loans – was ticking up only slightly and at 19.2% in the December quarter was well within bounds, as we can see below.
But a couple of measures of potential stress in lending finance are beginning to tick up. Owen points to the proportion of loans that are greater than six times the borrower’s income. In the December quarter, that measure moved up to 7% of the total of new loans but was 17.2% of all loans – a record for this relatively new data series.
The Australian Prudential Regulatory Authority (APRA) was comfortable with that because it is within the historical average. Hopefully then, the withering wit might say, “we are operating in historically average times right now.” You be the judge.
Inevitably, Owen also pointed to rising loan to value ratios (LVRs) as a further sign of emerging stress, in housing finance. LVRs lift when house prices go up and deposits are smaller, meaning more money has to be borrowed. Not good news overall, but again, no cause for immediate action either, according to APRA.
As ever, among economists there are always more views than the number of people in the conversation. So, there is an alternative proposition.
As Alan Kohler wrote in The New Daily, one of the main drivers for the increase, in lending activity, is low interest rates. Kohler describes this as a ‘ticking time bomb’ that is pre-set to explode in three years. To stimulate the economy, the Reserve Bank of Australia is “…providing virtually unlimited three-year funding for banks, also at 0.1 per cent. It’s called the ‘term funding facility’ (TFF).”
The TFF ends in June, but it could be extended. At the end of three years, it must be paid back. So, banks are lending on what we might call ‘open terms’ with the emphasis on three-year fixed rates. At the end of three years, the loans must be renegotiated to variable or new fixed rates.
So, banks are lending like there is no tomorrow and pushing money out the door in a bit of a hurry. Interest rates are thus historically and artificially low, and from here can only go up. Indeed, the RBA says to expect interest rate increases, in about three years’ time.
As Kohler puts it: “In effect, the RBA has pulled out the pin on a slow grenade.”
In that scenario, the mid-term could be a particularly unhappy experience for many households. Huge house pricing increases are being recorded across the country and we must think that this also has a lot to do with very low interest rates.
This is the mid-term worst-case scenario…
The fixed interest loan on the over-priced house comes to an end at the same time as everyone else. There are people who cannot afford their loans on the new, higher, interest rates. They have to sell their homes. The price of houses goes down. Others who need to refinance end up with little or negative equity in their property and struggle to find a lender as a result, in a tighter market. Housing markets collapse and, given the importance of housing to the domestic economy, the economy ‘softens’.
Now that probably will not happen, but it is always best to plan for the worst and be pleasantly surprised when it does not eventuate.
