Australia: Home Loans Dragged Even Lower

Australia: Home Loans Dragged Even Lower By First Home Buyers

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The ABS’ housing loan commitments series continued in February the weakness that has been in place since the phasing down (and then expiry) of the expanded First Home Buyers’ (FHBs’) grant at the end of last year. Commitments fell a further 1.8%m/m in February (J.P. Morgan: -2.0%, consensus: -1.0%), and now are running 22% below the peak levels of September 2009. Our long-held belief that housing activity would soften with the withdrawal of government policy support has played out in the housing finance numbers, though house prices and broader market sentiment have remained resilient. Given the shifting composition of demand toward investors, and the fact that average loan sizes in all groups are holding up, the recent weakness in housing finance probably is reflecting a cohort effect, and should have largely run its course.

The proportion of commitments lodged by FHBs continued to decline in February, sliding to 18.1% from 20.5% in the previous month. Significantly, this proportion is now below the average for the last decade, after reaching an all-time high of 28.5% in May last year. The inevitable lull following the drag-forward of demand into 2009 has put significant downward pressure on loan commitments in recent months, but should be approaching a bottom. Demand for fixed rate loans continues to wane, with widespread expectation of more rate hikes to come making such loans relatively expensive. Fixed rate loans as a percentage of all loans issued fell for the seventh straight month to now be just 2.1% of the total, and average loan sizes within this category are 16% below the levels of mid last year.

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The value of home loans issued fell 4.4%m/m over the month (ex-alterations and additions decreased 3.4%). Loans for investment purposes dropped around 1% in value terms, though this alone was insufficient to alter the trend of increasing investor representation – investors as a proportion of total loans (again by value) hit an eighteen month high at 31.6% in February.

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, the housing market is not without headwinds in 2010. After the dramatic withdrawal of first home buyers in the last few months, the precipitous fall in home loan commitments should slow substantially from here. We expect still sluggish demand for home loans over the remainder of 2010, but with prices well supported by a healthy labour market and a chronic undersupply of housing stock.

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ENDS

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