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Housing finance measures deteriorate

A few months of momentum in shifting housing finance back into positive growth was wiped out in December and January. Still, there was light at the end of the dark tunnel, with January 2024 up 8.5% on January 2023.

In the most recent prior issue, Stats Count was able to report, based on the November 2023 data, there was some momentum with positive growth in the value of loans. However, this changed with the January data falling 3.9% to $25.1 billion following a fall of 4.1% in December.

Interestingly, the ABS considers some of the January decline may have been a result of improved loan processing times, meaning loans that would previously have been approved in January were resolved earlier. Mish Tan, ABS Head of Statistics commented that:

“…liaison with lenders suggests that recent improvements to loan processing times increased the number of loans processed in peak periods this year, relative to prior years. Although owner-occupier lending has fallen for two months in a row, the growth in trend terms was 1.5 per cent over the year”.

That may be correct, however for First Home Buyers, a faster paced loan refusal presents not a lot of joy. They continue to be hammered, with their share of total loan values at 19.4% in January, down from 20.2% in December, and well off the peak of 26.3% of total loan values in January 2021.

We can see this in the chart below.

Writing in the Australian Financial Review, Nila Sweeney identified the cheapest dwellings as being out of the reach of the average First Home Buyer. She quoted Unloan’s CEO, Dan Oertli, who reported that the entry-level dwelling price in Sydney is currently valued at $927,000, meaning a borrower on the average post-tax income of $61,329 would not qualify for a loan, even if they had the 20% deposit!

Oertli pointed to that as a driver for increased purchases of apartments and flats.

In aggregate, the number of new loan commitments in January was 38,942, down sharply from 53,773 in November. Loans to First Home Buyer loans totalled 8,377 in January down almost 30% from the 11,934 loans recorded in November.

Unsurprisingly, the reduction in loan finance is directly linked to a reduction in demand for dwellings, which softens prices and thereby contributes to reduced average loan sizes.

In January 2024, the average loan size declined to $615,178, down 1.5% on the previous month. However, reflecting increases in property prices in earlier months, the average loan size was still 2.3% higher than in January 2023.

The chart below demonstrates a declining trend in total loan values, but relatively stable average loan sizes.

The challenge is not really the size of loans, but the capacity to repay them. In some respects an affordability question, but in this context, directly linked to the issue of mortgage quality and mortgage stress. With the release of the recent GDP data for December (discussed elsewhere in this edition of Stats Count), we can examine the macro picture of the capacity of borrowers to pay for their loans.

The December quarter GDP data is starting to show some of the impact of the interest rate increase in November, which took the cash rate to 4.35%. At these levels, we can see the household interest payable to income ratio has continued to move up. It is now running at 7.34%. This is getting closer to the previous peak of 8.69% in June 2008 the period of ‘irrational exuberance’, when the cash rate was 7.25%.

Put another way, the rising proportion of income expended on interest payments is clearly evidence of increased mortgage stress and mortgage affordability.

The flow on effect has been picked up in the recent Roy Morgan Research report on mortgage stress. The report defines households under mortgage stress as those who have to allocate between 25-45% of their after-tax income to repayments.

The data shows 1.609 million mortgage holders (31.0% of the total) were at risk of mortgage stress in the three months to January. This is sharply higher than the recent previous peaks recorded in August and September 2023. Importantly, mortgage stress is at its highest levels since the peak of 35.6% experienced during the GFC.

In terms of loan quality, some increase in arrears is starting to be materialise. While overall major bank arrears remain low – averaging 0.91% of loans across the economy – the Reserve Bank’s thirteen interest rate increases and 4.35% cash rate are starting to bite.

James Eyers reporting in the Australian Financial Review commented that:

“…(at) its interim results this month, Commonwealth Bank said it was supporting more than 7,000 home loan customers in formal ‘hardship’, including providing options to suspend mortgage repayments or move to interest-only repayments.”

Big banks or small, all lenders will be experiencing their share of similar challenges.

The state by state break down can be seen in the following chart produced by the ratings agency S&P Global Ratings.

James Eyers observed:

“…that in the biggest markets of NSW and Victoria, mortgage arrears are stable. In NSW, the proportion of borrowers more than 30 days late on repayments was 0.96 per cent in December, down from 0.94 per cent in July 2023 and 1.01 per cent in November. But in WA, more borrowers are behind: 1.19 per cent are more than a month overdue, although this had improved from 1.50 per cent in July last year. The best performing state is Tasmania, at 0.48 per cent.”

This seems to confirm the variable trading conditions in each State and some different trajectories for employment for at least some in the economy. Employment prospects and security, and the wages derived from work, are critical factors in household’s capacity to pay.

A lack of stability in employment, coupled with poor confidence in the building supply chain is not a situation likely to encourage too many to leap into a new home loan.

Posted Date: March 14, 2024

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