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Tuesday, 12 May 2015

Housing finance rages to record highs

Records go pop

The ABS released its Housing Finance figures this morning for the month of March 2015, and records were shattered left, right and centre.

To date this property market recovery has largely been an investor-led phenomenon.

Interestingly, however, the number of owner-occupier loans written is now also starting to fire up in response to low borrowing rates and rising dwelling prices.

The number of owner-occupier loans has been charted here on a smoothed 4 month moving average basis.

In respect of total housing finance written in March 2015 in seasonally adjusted terms the result came in at an astonishing $31.6 billion, an increase of 3.6 per cent on February and 15.4 per cent higher than only one year ago.

Total monthly housing finance has only breached $30 billion in a month on four occasions in seasonally adjusted terms, and those four occasions were each of the most recent four months.

This record high seasonally adjusted result was more than $1 billion higher than any previous monthly figure recorded.

And yet for three reasons I believe that even this record high potentially understates the true trajectory of housing finance.

Firstly, taking a look at the unadjusted "Original" figures, we can see the actual mortgage finance written was an unheard of figure for the month of March at $33.23 billion.

This is an increase of more than 22 per cent on the prior year comparative figure, so not for the first time in this fiscal year the ABS seasonal adjustments may prove to be a little askew or under-cooked.

Secondly, and more significantly, this rampant activity all took place before the cash rate was cut to a record low of just 2 per cent on May 5, which will only redouble the resolve of investors. 

And thirdly...well you'll have to ask me about the third reason over coffee.

Investor lending explodes

Meanwhile investor lending exploded 6.4 per cent higher over the month to a record high of $12.9 billion. 

This is an increase of 21 per cent over the prior year. 

More dramatically this is well over double the level of investment lending seen in March 2011 only four years ago.


Smoothing the housing finance figures on a rolling 12 monthly basis shows that the pace of increase in investment lending continues to outstrip that of owner-occupier lending.

However, both sectors are clearly now rising strongly in response to record low borrowing rates.

State versus state

I will return here at a later point in time to look at the investor figures in order to highlight just how heavily property investors have been focussing on Sydney.

For today, let's take a brief look at where the owner-occupiers are buying and in what volumes.

The first chart below shows that more than 202,300 loans have been written for New South Wales owner-occupiers in the past 12 months, as the fear of missing out steadily begins to take hold.

This is a high figure, to be sure, but is by no means a record as the below chart shows. 

A prime reason for this, beyond the shadow of any doubt, is that so many first time buyers in Sydney are now captured under the "investors" header.

Loans written to owner-occupiers have also picked up strongly in Victoria and Queensland.

I have already discovered through tracking and analysing specific properties that robust capital growth in Queensland has largely been an inner Brisbane phenomenon to date, while to date at least some of the outer suburbs and regions have lagged in the face of rising unemployment (more detail on this later in the week). 

It was mildly amusing to note that the number of owner-occupier dwellings financed in South Australia increased in March by exactly one (1).

I think it would be a fair assessment to say that the South Australian response to low mortgage rates has been somewhat subdued to date.

More pertinently on a rolling annual basis the number of owner-occupier loans written is now in a moderate decline both in South Australia and Western Australia.

On the other hand moderate increases have been seen in each of the three smaller states and territories.

A record $70 billion in New South Wales

In terms of the value of owner-occupier loans written we can see why prices are set to rise so strongly in Sydney with an unprecedented $70 billion of finance written in New South Wales over the last 12 months, an increase of 13 per cent year-on-year. 

$6.5 billion of finance was written in NSW in the month of March alone, while Victoria has recorded an equivalently outsized increase over the past year.

The rolling annual value of Queensland's owner-occupier finance has increased by a study 9 per cent  year-on-year to $37 billion, a figure which masks an inner Brisbane bias within the state. 

The surprise package is Tasmania which has seen a 10 per cent rolling annual increase, albeit from a very low base.

The wrap

There is far too much data in the Housing Finance release to cover off properly in one blog post.

I will consider the composition of loans - including who is purchasing and constructing new dwellings and where - in another post, and  as noted will look at investor lending separately too. 

The key takeaway from this release is that housing finance appears to be accelerating in response to low borrowing rates - and remember all of this was taking place even before the most recent interest rate cut.

Sydney in particular is witnessing a red hot property market.

The lower north shore once again led the way on Saturday with an auction clearance rate of more than 95 per cent, but in truth almost all of Sydney is now firing on all cylinders.

It seems to be the case that a number of observers are labouring under a misapprehension as to how this boom in lending is being perceived by the central bank.

There are certainly some justified concerns that investment lending is rising too quickly - but it's hardly as though the increased borrowing activity is being seen as a "bad thing" given that mining investment is set to collapse (as evidenced yet further by more forecasts released by the major resources players this week). 

Credit growth is required and wanted from the housing market to fuel construction, and from business to pump investment.

Heck, even the Treasurer himself advised Aussies now is a good time to borrow money and spend.

Prices to run higher

Moreover, there is no respite in sight for first homebuyers in Sydney based upon the evidence that I have seen at first hand.

The latest Residex figures show that median house rents in Sydney have risen by 8.3 per cent over the past year, and median unit rents by 5.8 per cent, typically an indicator of undersupply and nearly a decade of under-building in the harbour city.

Consequently, with rents continuing to rise median unit prices of $620,000 continue to yield an average of 4.62 per cent according to the Residex data.

Fixed rate mortgages are now available with a stunningly cheap "3 handle", and I have attended auctions in the past week where hypnotised buyers have bid gross yields on apartments all the way down to a ridiculously low low 3.6 percent (assuming purchases were made for the purposes of investment).

In truth those working in the property market can only ever see a snapshot of what trends are unfolding.

Yet if this kind of activity is replicated across the market then Sydney apartment prices are set to explode higher over the next 18 months.

Even if the "acceptable" median yield is seen by investors to be around 4 per cent, then based upon the Residex figures we are staring down at least another 15 per cent capital growth, putting a whopping $100,000 or more on median unit prices. 

I'll come back tp the housing finance figure with some more in-depth analysis in a later post.