Housing finance data for June defied the pandemic, with the total value of loans lifting 6.2%. That solid result, fuelled in part by some recovery, and in the main by a lot of stimulus, has driven performance that needs a closer level of examination. The role of first home buyers and investors in the market might well represent increasingly divergent opportunities and risks.
We avoid ‘day trading’ our superannuation, and we probably need to avoid that behaviour when it comes to the regular housing finance updates. To mix our metaphors, ‘one swallow does not a summer make’, or to be less obtuse: we need to follow the trends, not the moments.
So, while we can see the lift in June in the chart below, that does not break the trend, it really continues it. One view could be that the anomaly was May and that June was a return to business-as-usual. But it was not quite that, because on a quarterly average basis, as Greg Jericho advised in The Guardian, “…even with the big jump in June, the level of finance taken out to buy residential properties was down 10% on what it was in March.”
Fig 21
To go straight to the dashboard and take a closer look at the data, click here.
We are of course interested in the roles of investors and first home buyers, and we will return to them later in this analysis. But first, we want to see what makes up the data above.
Housing finance is made up of two factors: the number of loans and the value of those loans. As Greg Jericho pointed out:
“As a rule the growth of the value and number of home loans move together. Sometimes the value grows quicker, which means that the average value of home loans is rising. At the moment that average is rising fast:…”
Jericho provided the following chart to emphasise the point that on average, loan values are rising very quickly.
Fig 22
There is a simple reason the average price of dwellings is on the rise right now: under-supply of stock on the market.
So, most importantly, the number of loans being issued is fairly stable right now – with a solid bump up in June, but the value of those loans has grown far more sharply over the last year, in fact by around 10%.
This is not necessarily the result of house prices which have fallen in aggregate during the period. So what else might drive this result. One possibility might be an increase the loan to valuation ratio. Ie the deposits required may be reduced reflecting the impact of programs such as Government’s loan insurance initiatives.
So, who is in the market right now? For some time it has been all about Owner-Occupiers whose share of total loan value in June was 74.6%, with investors filling just 25.4% of the loan book by value. We have been cheering on the first home buyer cohort forever, it seems. They create new households after all and that’s the lifeblood of the housing economy, when all is said and done. In June, they were neck and neck with investors at 22.0%.
Fig 23
To go straight to the dashboard and take a closer look at the data, click here.
Though we cheer them on, many first home buyers are among the people being hardest hit by the economic impacts of the pandemic and the response. Their work is more likely to be precarious and they are less likely to have spare funds available: they just sank their hard-earned into their loans.
There is a risk that as time passes, higher levels of lending by first home buyers could represent the most unfortunate of risks in the housing finance market.
In the next chart, Jericho pushes housing finance forward six months, with the assumption that a sale in June is a loan in December and so on. This suggests a nexus between house prices and housing finance. Ie a change in one results in a change in the other 6 months later. Note that when the 6 month delay on housing finance is overlaid on current house prices the graph infers that house prices are expected to continue to rise through to the end of 2020. But what happens after that?
Fig 24
Ultimately, the divergence in the number and value of loans cannot be sustained.
With household debt, employment and income concerns, worries over leverage ratios, it seems unlikely there will be a rapid uptick in the number of households capable of taking on new or additional debt to soak up stock at the prices currently being realised.
Additionally, the mortgage deferrals implemented by the major trading banks will need to be gradually unwound over coming months. This might result in some foreclosures placing more stock onto the market, right about the time when there are likely to be less buyers in the market due to subdued economic conditions.
We also need to be mindful that COVID 19 has deeply affected net migration which is forecast to decline by 200,000 people. This will take a chunk out of ongoing household formation rates.
As a result of these known and expected factors, housing market economists are suggesting that house prices could fall, perhaps by as much as 10% from recent peaks.
When will that occur?
Well, it is like many things right now: uncertain. But the first quarter of 2021 has a pencil mark in it for now.
