Lending for housing declined 1.7% on the previous month in May, falling to $28.8 billion. However reflecting the underlying strength of the property market and the growth in established real estate prices, the value of lending was 18% higher than in May 2023. Lending values are way above their long-term averages and ahead of the long-term aggregate trend.
As with all things, the devils are in the details and we can see below, the different trajectories for – for instance – first home buyers on the one hand and investors on the other.
Examining loans by purpose at a more detailed level allows for even more granular understanding, presented here on a year-ending basis. Loans to investors have risen 29.5% year-ending May 2024, for instance, well ahead of the aggregate growth of 18.0%. By contrast, the value of first home buyer loans has risen just 5.2% over the same period.
Clearly, housing affordability is a major challenge for Australia and that is flowing through to lending practices and levels. Nowhere is this better reflected than for first home buyers.
Given the affordability challenges of rising home prices and high interest rates, ‘newbies’ are still getting it in the neck. The percentage of total loans to First Home buyers was 19.1% in May down from 19.7% in April. First Home Buyers are focussed on getting their own home, with more than 92% of loans to them being for occupation and less than 8% for investment purposes.
Affordability and its closely related driver, supply and availability, are prevalent across the country, but they do play out in different ways in each state and across the regions.
Evidence of that can be observed in house prices. The rise in house prices has not been uniform across the country, which is why total lending for Owner Occupied Housing was not uniformly down.
In Western Australia, total lending for owner occupied housing was up 2.6%, while Queensland rose 0.8%, compared to a decline in Victoria (-2.4%). Other states and territories experiencing declines were New South Wales (-7.9%), South Australia (-1.7%), Northern Territory (-6.3%) and Australian Capital Territory (-1.4%).
The ABS median house price series provides a macro view of dwelling prices. The decline in dwelling prices in Melbourne and Canberra, and the moderate growth in NSW, correlate with the reduced loan activity in those states. That is, where total loan values are deteriorating, it is likely that median prices will also be declining.
Duncan Evans, writing in the Australian, quoted Maree Kilroy, Senior Economist, Oxford Economics, Australia who commented that:
“The bifurcation of the Australian property markets continues to play out. Perth is running hot while at the other end of the spectrum is a languishing Melbourne market”.
Taking those two markets as examples, there is evidence and regular commentary suggesting that for many years, Perth had a significant under-supply of dwellings due to harsh cyclicality, while Melbourne has had a more consistent rate of building and is closer to supply equilibrium.
Overall, Ms Kilroy expects price growth next year, fuelled by interest rate cuts in early 2025, compounded by the sustained housing shortage. Kilroy commented that the limit on those gains will ultimately be housing affordability.
A closer look at affordability data for March shows the ratio of average home loan to household income per capita is 10.7. matching the previous record set in 2022. That is, on average, Australian housing is currently at its equal least affordable level in history.
Source: ABS Cat 5206, 5601
There are also challenges with loan quality, as general economic conditions tighten. In its March quarterly report, APRA, the banking and finance sector regulator, observed the percentage of non-performing loans had increased to 0.95% of total loans, which is above the series average of 0.86%. Whether that I sufficient distress to be creating concern among regulators is uncertain, but it is at least another sign there is mortgage stress and therefore affordability pressure being applied to the Australian housing market.
Another measure of loan quality is the Loan to Valuation Ratio (LVR) for new loans. According to APRA, in the March quarter, new lending for dwellings with high LVRs remained near historic lows. The share of new loans with an LVR greater than 80 per cent was 31% during the period, which remained well below long term trends.
Overall, this is good news, long planned by APRA, which put a set of brakes on lenders to assure the quality of their loan books, by requiring households to have as much equity as possible, as a buffer against the types of mortgage stress currently being experienced. To place that in context Tim Lawless, Research Director at CoreLogic in reviewing the APRA data said:
“It is likely mortgage arrears will increase further as unemployment lifts, household savings deplete further and, more broadly, economic conditions navigate a period of weakness.”
However, he sees that stress as manageable unless we experience a material change in labour markets.
At a macro level, tight lending criteria makes great sense when dwelling prices have spiked higher due to a lack of supply relative to demand and especially when households are forking out more of their incomes than ever before to cover their often exorbitant loans.
