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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 13 May 2015

Peak new home lending?

Peak new home lending?

The Housing Industry Association put out a release yesterday which highlighted that in the March quarter 25,639 loans were written for the owner-occupier purchase or construction of a new home or dwelling.

This was a decline in the number of loans written to owner-occupiers of 4.9 per cent on the December 2014 quarter, and also a 4.9 decline on the prior year comparative figure.

In the first quarter of the year material gains in Tasmania (+50 per cent) and New South Wales (+3 per cent) were offset by declines in South Australia (-15 per cent) and Western Australia (-11 per cent).

The implication of this is that new home lending to owner-occupiers peaked in 2014.

Let's take a short look at what's happening.

New dwelling commitments

The March 2015 Housing Finance figures show that 2,777 loans were written in the month for the purchase of new dwellings.

Smoothing the data on a 4 month moving average basis, the number of new dwelling commitments can be seen to be healthy, but the trend does look peaky.

Similarly in terms of the rolling annual value of new dwelling commitments, new home lending looks to have hit a plateau.

Loan by purpose

I wonder at times whether this information is indicative of future trends in the construction cycle, however.

The data does show that the overwhelming bulk of loans processed domestically are for established dwellings.

Over the past year around 73,400 loans have been written to owner-occupiers for the construction of new dwellings and only 33,300 for the purchase of new dwellings.

The remainder of the new dwellings constructed must be purchased by investors, by offshore buyers or paid for in cash.

Recent surveys suggest that a high proportion of new stock in the most populous cities is sold to foreign investors.

The latest building approvals figures suggest a residential construction industry approaching its full capacity with a record of 210,000 approvals for the past 12 months.

Even at this early stage in the construction cycle it is transpiring that there is a shortage of skilled project managers and bricklayers, particularly along the eastern seaboard.

Theoretically, skilled workers could be brought in from overseas, but either way, there is likely to be a cost attached to the skills shortage.

Meanwhile the Reserve Bank's liaison has picked up upon early indicators of inflation in building materials prices, with the rate of inflation in building costs and new dwellings inflation continuing to rise very sharply towards 5 per cent per annum and beyond.

Construction loans

The value of construction loans written has responded very well to low interest rates, both for owner-occupiers and investors.

Reno "boom" fizzer

On the other hand, the much vaunted "renovations boom" has not materialised in any meaningful way, shape or form.

Only Sydney is showing any vital signs in this sector, despite a chronic oversupply of airtime having been awarded to the television renovation show space.

The wrap

Overall, building approvals and construction are responding very strongly to low interest rates.

However, it appears likely that there will be to be a limit to how much residential construction can be undertaken in a cost-effective manner before capacity is stretched, with wages and materials inflation set to bite.

Historically, increases in dwelling investment in previous cycles have put intense pressure on the supply of available building materials leading to a sharp inflation in the cost of newly built homes.