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

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Wednesday, 11 February 2015

Housing finance straps on a jet pack

Housing finance rockets

Earlier in the week I took a detailed look at what is happening with dwelling prices around the country following the release of the ABS Resi Price Indexes.

This morning the ABS released its Housing Finance for the month of December 2014.

Well, gosh.

As I suggested after last month's data spawned a chorus of "housing finance falling" headlines (or at least, comments), looking at one month's figures in a gyrating data series in isolation is always likely to result in misguided conclusions.

Indeed, the quarterly volume of loans written was tracking at record heights - with the monthly figures breaching $29 billion for the first time only in September and claiming a "hat-trick" by repeating the jape for three months in a row.

We should now make that four-in-four, because in December housing finance ripped to unprecedented heights of $30.6 billion, an increase of 4.7 percent on the month - the most significant monthly gain since Q3 2013 - and 14 percent higher than the prior year figure.

Investment housing loans boomed by another 6 percent in the month to be 19 percent higher than a year ago.

This is particularly striking since the data is historic and all of it relates the period before the February interest rate cut - and thus this result will raise further interest from the market regulator APRA.

With owner-occupier commitments rising across the board in every state and territory, it seems increasingly likely that low interest rates are going to light a fire under the Aussie housing market in 2015.

Let's take a look at what we can learn in four short parts.

Part 1 - Housing finance rockets

Having seemingly threatened to have peaked, the number of owner-occupier commitments jumped by 2.7 percent in December. 

On a 4 month moving average basis, therefore, the uptrend is thus resumed.

But it was the value of loans written that was the really dramatic result.

On a rolling annual basis the value of owner-occupier loans has now surged by 11.4 percent and investment loans by a rip-roaring 24.6 percent.

It's a property boom being led by our largest capital cities which now appears likely to take some reining in.

Part 2 - State by State

The number of owner-occupier commitments increased in every state and territory, the most material surge being a 7 percent monthly uplift in New South Wales. 

The value of owner-occupier commitments surged across the board too, with a massive 11 percent increase in New South Wales in the month and total monthly commitments in that state smashing through $6 billion for the first time ever.

On a rolling annual basis New South Wales has seen a huge 14 percent uplift in owner-occupier commitments, with Victoria (+12 percent), Queensland (+12 percent) and Tasmania (+14 percent) all seeing sharp increases.

Western Australia (+8 percent), the ACT (+5 percent) and South Australia (+8 percent) all saw increases on a rolling annual basis too. 

The above chart shows how some states are coming from a much lower base than others.

Part 3 - New dwellings being sold offshore?

I looked long and hard to see if I could find any weaknesses at all in this data - even first homebuyers are now being reported at 14.5 percent of all purchases and 11 percent in New South Wales - and I think I located it in the new dwelling commitments figures.

New dwelling commitments on a 4 month moving average basis look to have peaked way back in July 2013.

Similarly the value of commitments for new dwellings has hit a plateau since February 2014.

What gives? 

We approved a record high 200,000 new dwellings in 2014 and new home starts have been catapulted to their highest ever quarterly result yet we are simultaneously writing loans for new dwellings at only a fraction of that level.

In short, either we have a helluva lot of domestic cash buyers or Australia's new home market has become our latest thriving export industry (it's the latter). 

Nothing wrong with that, most would argue, since this adds to the dwelling stock and will eventually pull down rents and prices later in the market cycle. 

On a rolling annual basis most loans written domestically continue to be for established dwellings, unsurprisingly.

Part 4 - Construction loans rocket

Finally for today, while an anticipated major renovations rebound ("alterations and additions") has remained relatively muted outside Sydney and has contributed approximately "stuff all" to GDP growth, there is much more encouraging news on the construction front.

In fact, December 2014 was by a huge margin the greatest month on record for construction finance with another 15 percent increase in the month. 

On a rolling annual basis the value of construction finance for owner-occupiers zipped 17 percent higher, while investor construction has gone nuts, up 32 percent on a rolling annual basis after another an all-time record figure for December.

All available data and evidence suggests that we are set for a residential construction boom which will run stronger and for longer than analysts had previously thought.

The Wrap

On Friday I will take a more detailed look at where this enormous surge in investor activity was concentrated - the November figures which I analysed here implied Sydney and inner Brisbane.

Before then, of course, we have the latest labour force figures to look at tomorrow, a much anticipated release.

The stand-out point from today's release was that housing finance is burning up, and all of this action took place 5 to 9 weeks before another interest rate cut. 

In summary, then...boom.


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