In November, the Australian Prudential Regulatory Authority (APRA) introduced a series of new macro-prudential rules for lending. Intended to constrain loans by increasing the serviceability buffer, the regulator was confronted by lending commitments lifting 6.3% compared to the prior month and reaching $31.44 billion.
Logic dictates that the increase in the serviceability buffer would require higher deposits and/or would result in reduced average loan values. However, at the national level, the average loan size for owner-occupier dwellings (which includes construction of new, purchase of new and existing dwellings) rose to an all-time high of $595,568!
We are prepared to concede this could be inclusive of timing issues, with some loans written in November but essentially committed the month before. That qualification aside, what the data may be telling us is that households actually have more cash available than imagined, or those seeking loans have more capacity to pay than expected. In some cases, both could be true and neither would be a surprise. After all, where could you spend money over the last two years?
The first chart shows the long run of the value of housing loans, including the spike experienced in November.
If we accept that APRA’s prudential impact will be felt in coming months, the next factor about which to be a little wary is the role of investors. Cashed up and with nowhere else to gain yield, loans to investors tipped up to $10.1 billion, an increase of 3.8% over the previous month.
The issue is that this is squeezing First Home Buyers whose percentage of loans dropped to 18.6% or $5.38 billion in November.
A further concession here is that there is another factor at play for first timers. Many have their loans and have built or are building their own slice of the national dream. The boom delivered for many, though not of course for all. Because there has been no migration to speak of for two years and we also have few temporary residents, the pressure of a pipeline of new first home buyers is diminished.
Moreover, the closures of night clubs, pubs and bars may have reduced the opportunities for those seeking a partner with whom they might acquire their fifth of an acre in the ‘burbs, from which to establish their shared future. If you don’t form a relationship, you cannot form a potential household to create new housing demand.
November did see existing owner-occupiers heavy in the lending market, for established properties (up 7.7% to $16.30 billion), for construction (up 8.2% to $2.34 billion) and newly built (up 3.0% to 1.25 billion).
On a year-end basis, we can see below the impact new construction loans have had on the total market.
As Greg Jericho pointed out in The Guardian, growth in the number of loans being written has slowed but remains very strong. In November, the number of loans lifted again to total 65,834, with First Home Buyers able to achieve 21.4% of the loans. With the average value of all loans lifting sharply to $549,367, the gap to First Home Buyers pushed out to about $72,000 or a little more than 13%. That margin is the all time peak in dollar terms and likely also in proportional terms
We can see the recent experience below and speculate that the super-heated property market has a lot to do with the differential that is – all jokes aside – making the housing market a very difficult place for anyone entering the market for the first time.
The risk APRA has been seeking to alleviate is exactly this:
Rising house prices, fuelled by lax lending rules and an economy awash with cash seeking a home (literally), continuing to drive house prices up, causing increased borrowings on ever narrower buffers and margins for borrowers is a recipe for an economic crash in the one sector of the Australian economy that none of us can do without.
As Jericho puts it:
“So yes, low interest rates make affordability better than it would have been with higher rates. But those low rates and the fiscal measures in turn increase prices and thus affect mortgage sizes.
For new homebuyers it seems they always get hit either way.”
That is the risk for the regulator and it really does seem, they too are damned if they do, and damned doubly if they don’t.
