Reflecting rising interest rates, the total value of housing loans was $23.44 billion in December, down 29.3% compared to the prior year and 4.3% lower than in November. As mortgage pain continues to bite, refinancing is at record levels, but unsurprisingly, it is first home buyers who are really being squeezed.
December was the eighth successive month since May 2022 the total value of loans fell. As the chart shows, just as they ramped up very quickly, so too are they declining sharply.
It is clear all ‘classes’ of borrowers are impacted, with the most recent month’s data seeing first home buyers suffer a 4.6% month-on-month decline. This is the second consecutive month first home buyers have suffered the largest decline in loan values – we can expect that to continue.
The Australian Financial Review’s Michael Bleby reported a mortgage broker saying the declining value of existing properties, coupled with the rate rises, was particularly difficult for first home buyers because their capacity to borrow was falling. Many are reportedly out of the market while they recalibrate their capacity, the locations and their total plans.
Here we can see first-timers gradually being priced from the market, with their share of all loans now down to 16.5% by value, falling a steep 0.5% in December alone. Just two years back, they peaked at 26.1% of total loans!
To date, this experience is not being seen in the average value of the loans being taken out by first-timers. At $487,135 in December, the average is modestly lower than the peak in October, but around the same as in July of 2022. The chart here shows the slight downtick in those loan values, but also shows the average value of all loans continuing to rise, moving up markedly to $555,840 in December.
What that means is the average value of loans to established borrowers is growing. The delta between the first-timers and the established borrowers is growing. It is of course worse for those who are out of the market, trying to find their way in.
Overall, the annualised decline in loan values is looking as steep as the ‘unprecedented’ rise in values that took hold as the pandemic was in full force. As this second chart shows, now running at 29.3% lower than a year earlier, total loan values have declined at their fastest rate since at least 2015.
Recent months have also seen a continuation of record refinancing activity as existing mortgage holders refinance to find lower rates or better terms. With increased mortgage interest rate and repayment pain to come, this is expected to continue to increase.
This is the ‘mortgage cliff’ much debated in recent months. As Tony Boyd wrote in the Australian Financial Review, this:
“… confronts thousands of borrowers who will roll off cheap fixed rate loans (averaging about 2.5 per cent) and on to much more expensive variable rates loans (likely somewhere about 6 per cent)…”
Refinancing might be the best bet for many, but for others, it will be time to cash in their chips and wait for a better time to get back in. That’s one theory, but the other – and this is where real distress lies – is that is not an option because the value of the property is less than the equity held by the mortgagee.
At its worst, defaults, repossessions and evictions are the result. We are not likely to get there, but it does bring back unwelcome memories of that chilly US term from the GFC – jingle mail – where householders simply walked away from homes, sending the keys to their lender and declaring themselves bankrupt.
Australia’s housing sector, finance system and lending profiles mean we are still a long way from that horrid day, but the pain is out there and it will get worse before it gets better.
