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Saturday, 9 April 2016

AFG sees fixed rates in favour

Lending growth steadier

Now listed on the Australian Securities Exchange, Australian Finance Group (AFG) released its mortgage index for the third quarter of fiscal 2016.

The index, which is not seasonally adjusted, showed a steadier pace of annual mortgage volumes, with total lending of $12.98 billion representing a +5.7 per cent increase on the $12.23 billion seen in the March quarter of 2015.

The actual number of mortgages lodged was broadly unchanged from a year earlier at 27,353, suggesting that markets are consolidating.

The investor market share has pulled well back from its peak of 40 per cent to steady at around a much more sensible 33 per cent. In fact, there was a bit of a rebound from 31 per cent in the preceding quarter.

The average new loan size in the quarter of $474,360 was essentially as high as this figure has been, up by $28,400 or +6.4 per cent from one year ago.  

Over the past three years low interest rates have done pretty much what you would expect they would, and the average new loan size written has increased by $82,400 or +21 per cent.

State versus state

The above having been said, AFG's national picture masks quite a significant divergence between the resources states and the rest.

Clearly over the last few years New South Wales and Victoria have experienced the bulk of AFG's mortgage volume growth, but over the last year Queensland (+7.6 per cent) and South Australia (+11.3 per cent) have also joined the party.

The same is not presently true in the resources states, however, at least for AFG's mortgage aggregates, where  year-on-year volumes are down substantially.

Despite this drop in activity, lot prices in Perth have been rising at a sprightly pace, and the average loan size in Western Australia hit a record high of $454,498, while New South Wales also saw its average loan size hit a record high of $590,095.

Over the past three years the average loan size has increased in New South Wales by a thumping $130,000 or +28 per cent, with Victoria (+18 per cent), Queensland (+14 per cent), Western Australia (+13 per cent), and South Australia (+12 per cent) all experiencing significant increases.

The wrap

Overall the figures suggested a steadier pace of mortgage growth in the early part of 2016, and a bit of a rebound in investor market share.

In particular there was a shift towards fixed rate mortgages, which is perhaps not that surprising given that 3 year fixed rate home loans have been available from as low as 3.99 per cent, meaning that the downside risk to fixing has been minimalised.

Furthermore while a low inflation print on 27 April could arguably pave the way for further monetary policy easing - at least if the rate of employment growth slackens off - consumers may remain wary of adverse out of cycle moves from lenders.

These dynamics prompted 17.7 per cent of AFG's total volume for the quarter to be fixed rate loans, a significant jump from the first quarter of the financial year at just 11.4 per cent.

In spite of media talk of irresponsible lending the average LVR on new loans of just 68.8 per cent was the lowest figure for three years.

In New South Wales the average LVR on new loans in the March quarter was just 65.8 per cent, and in Queensland it was only 69.9 per cent.

No information is provided on to what extent the deposits used on new loans are drawn from pre-existing equity.