In February 2023, total housing finance fell for the tenth consecutive month, since the RBA commenced the cycle of interest rate increases that dominates the nation’s BBQ conversations right now. There is no surprise in the continuing declines, with First Home Buyers still being flogged from a market that is a little too hot for many.
The first chart shows total housing loan approval values and indicates that compared to a year ago, the value of loans was 30.9% lower at the end of February.
February itself saw total loans down 0.9% on the prior month, while Owner Occupiers lost 1.2% by value and Investors a relatively softer 0.5%.
Loans can only be financed – for new properties anyway – when there are sales underway. The situation or outlook on that front appears a little patchy because some developers are struggling to get capital from their lenders at the moment, as Robert Harley wrote in the AFR in late April. It is not always demand that slows approvals – the supply side plays a role also!
Something of a bell-weather for the national housing market, First Home Buyers continue to struggle to make ground in the housing market – instead they are forced to seek ever more expensive rents. Their share of the total loan value in February 2023 was 16.7%, up marginally on the prior month, but with February an especially quiet month for housing finance, that could be a moment in time and no more.
The average value of loans to first home buyers has remained fairly stable over the last few months and was $482,919 in February 2023.
On the other side of the lending ledger, loans for alterations and additions were up 20.1% in February. It is true, as the chart shows, that renovation and conversion expenditure is pretty patchy and moves up and down fairly regularly. However, increased loan approvals mean there is capital available to flow through into this activity.
As interest rates rise, the other factor in the housing finance market is refinancing of existing loans. This has continued to grow as interest rate increases encourage mortgage holders to look for better deals. This demand is augmented by those mortgage holders with pandemic-linked low fixed rate loans expiring this year. Refinancing in February was $19.9 billion, up 2.7% on the prior month.
The chart is telling, with Owner-Occupiers increasing their refinancing activity by 3.5% by value in February compared with the prior month. By contrast, Investors lifted their refinancing by 1.0%. All the anecdotes from banks and mortgage brokers is that the wave of refinancing is continuing and is not expected to abate until the end of the year.
One reason it may take some time for households to get through this round of refinancing is that at a macro level, mortgage holders have built up buffers on their loan repayments.
As monthly repayments have increased as a share of household disposable income one might expect an increase in non-performing loans. The buffers are protecting against that however, with the Australian prudential Regulatory Authority (APRA) quarterly report for December 2022 showing no increase in non-performing loans overall, and only a slight increase of new non-performing loans in the quarter.
There is probably a lag effect on loan non-performance, but there’s certainly no reason for panic about a run of mortgage defaults, especially where there are so many opportunities to get a new loan, on better terms. Certainly, As Ayesha De Kretser pointed out in the AFR, the big banks are running hard against one another for market share, like there is no tomorrow.
