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Lending is tracking house prices

Prices for Australian housing continue to increase, pushing mortgages and lending to new heights. The value of new housing loans lifted 17.9% year ending March 2024 to $27.6 billion. One driver for the increase was a 1.6% lift in the average size of loans over the period, seeing a rise from $598,624 to $607,963 in March.

In the first chart, we can see the total value of loan approvals continues to rise, with all classes of borrower seeing increases.

On a monthly basis, total loan values lifted 3.1% in March, with the big mover being First Home Buyers (+4.4%). Good news? Probably not. The likelihood is they are paying more for the same dwellings, whether new or established. Growth of 3.8% for investors was solid and the 2.8% monthly growth in loan values for owner occupiers was also notable.

The average loan sizes are displayed below for owner occupiers. The right hand side and the black line demonstrate the average loan value of $607,963, showing clearly a rebound from the prior month’s relatively sharp fall. In any event, the March result was above the $600,000 mark, holding value with the latter part of 2023.

Importantly for our industry loans for new construction totalled $1.4 billion, up 0.2% for the quarter.

As alluded to at the outset, first home buyers are still getting it in the neck, in a variety of ways. Their proportion of loans by value was 19.8% in March 2024, which is not much change from the past 12 months. What is a little different is that the number of loans issued to first home buyers lifted to 9,918 in March, a rise of more than 400 on the prior month. With that rise came a lift in average loan values for first home buyers, to $527,723.

The authors are probably ageing a bit, but that seems like a pretty big loan for a first home buyer, at around 87% of the total average loan size. We can remember when… Well, we all get the point. Perhaps this is a sign of the modern times, not more nor less, but its certainly different to the experience of the past.

Because it is hard to see how some people afford their loans, it is relevant to consider loan quality, which is monitored by APRA. The regulator’s quarterly report shows some increase in non- performing loans, but they are still at historically low levels. For instance the proportion of non-performing loans with credit outstanding was 0.82% in the December quarter, which remains lower than the pre-COVID rate, which was 0.89% in the December quarter 2019.

Non-performing loans are definitely tracking up, but at least for now, they are not the primary concern of the system.

As discussed above we can see the link between dwelling prices and the overall level of housing finance. In the December quarter, median house prices rose to $933,800. This amounted to a quarterly increase of 1.5% and annualised at 4.8% for 2023.

As Nila Sweeney observed in the Australian Financial Review in early May, this is a trend set to continue:

“The nation’s housing supply shortage will shield prices from a sharp downturn if interest rates rose further, or stayed higher for longer…”.

There is something of a push-pull effect in this instance, with one measure following the other. As house prices rise, the value of loans goes up with them. Then, when the value of loans goes up, the prices of the dwellings also increases. The role of interest rates in driving higher prices is well understood.

Depending on where you sit in the housing system (established owner or newbie), this feedback cycle is either a sugar hit to the household balance sheet or further evidence of the unachievable nature of the dream of home ownership.

The final chart demonstrates the correlation/feedback between average prices and average loan size. There are differences and while they rarely meet for long, its clear both follow more-or-less the same track.

In the broader national debate about encouraging more housing activity, one consideration is how to allow increased levels of risk within banks, allowing them to free up capital for those who might otherwise struggle.

On ABC Online, Nassim Khadem commented:

“…the CEOs of ANZ and NAB have called on the government to ease current rules around lending, saying they are so restrictive that it has created an inequitable system where banks can loan to wealthier people but medium and low-income households are often locked out of financing.”

One call that Khadem addresses is the proposal to water down the responsible lending laws, to encourage greater risk taking. Bankers appeared mostly to support the proposition, while social and community organisations were unimpressed., even when confronted with the relatively low arrears data.

Though it is not intended this way, there is little point in allowing irresponsible loans just to stimulate economic activity. On the dark side of that equation is a level of unnecessary grief and different economic woes… and the odd excoriating Royal Commission.

Sorting out lending finance and housing affordability to stimulate a lustreless housing sector requires more than just thrusting people into debt many can already ill afford.

Posted Date: May 8, 2024

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