Aussie Home Loan Demand Slumped Further In Dec

Aussie Home Loan Demand Slumped Further In December

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The total number of housing loan commitments issued in Australia plummeted again in December, falling 5.5%m/m as expected (J.P. Morgan: -5.5%, consensus: -5.0%), after a downwardly revised 6.1% slide in the previous month. The December result marks the fifth decline in the latter six months of 2009. The lull in home loan demand owes to the phasing out of the expanded first home buyers’ (FHBs’) grant in the final months of last year, combined with the RBA’s assertive rate hikes and the decision by several major banks to out-hike the Reserve Bank in early December.

The proportion of commitments lodged by FHBs continued to decline in December, falling to 21% from the all-time high of 28.5% reached in May last year. On average, FHBs accounted for 26% of all loans issued to owner-occupiers in 2009, well above the 19% of the previous year, thanks to the government’s decision to expand the FHBs’ grant in October 2008. The expanded grant, along with historically low real mortgage rates, drove the outperformance of the Australian housing market relative to international peers over 2009.

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Fixed rate loans as a percentage of all loans issued fell for the sixth straight month, and now account for just 3% of the total. While the official cash rate is expected to continue rising over 2010 (and the RBA indicated as much in last week’s Statement on Monetary Policy), pricing of fixed rate loans will remain prohibitive relative to variable rate loans for some time yet. We, therefore, expect demand for fixed rate loans to remain weak in coming months.

The value of home loans issued fell 2.8%m/m in December, due to a 5% drop in finance for owner-occupiers. Loans for investment purposes pushed up 2% over the month, with investors accounting for 29% of all loans issued by value.

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Given that the expanded grant ended on December 31, price caps on the original grant became effective at January 1, and that mortgage rates are poised to rise further, demand for home loans should settle closer to long-run average levels in 1H10. Indeed, private survey data indicates that house price momentum slowed significantly in 4Q09, implying that the stunning 5.2%q/q gain in nationwide house prices reported by the ABS belies a softening trajectory of activity, and that the latter figure may be subject to revision, as was the case in 1Q09. Some payback for the stellar performance of 2009 was inevitable, and rising interest rates will certainly cap the upside near-term.

The medium term outlook for 2H10 and beyond suggests further tightening in the housing market however, with increased skilled migration and a swelling investment pipeline adding to housing demand. On the supply side, little has been done to address the chronic shortage of housing supply arising from a sluggish approvals process and burdensome taxes and levies. The recent withdrawal of one building insurance provider from the market adds additional uncertainty to the development process, further dimming the outlook for residential building activity. The undersupply of housing will, therefore, continue to support house prices, albeit in a fairly undesirable fashion.

ENDS

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