Australia: housing finance falling off a cliff

Australia: housing finance falling off a cliff

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The total number of housing loan commitments issued in Australia nose-dived 7.9%m/m in January (J.P. Morgan: +3.0%, consensus: +2.0%), having already plummeted 14% between September and December 2009. We have for some time expected that housing activity would soften in 2010, though we had forecast a minor rebound in January, given the collapse in demand for loans that accompanied the phasing down of the expanded First Home Buyers’ (FHBs’) grant and the three consecutive 25bp rate hikes in 4Q09. On today’s data, the early message is that the hangover from the Government’s intervention in 2009 may be more significant, and depress activity for longer than many anticipated.

The proportion of commitments lodged by FHBs continued to decline in January to 20.5%, and is now approaching historically normal levels for the last decade after reaching an all-time high of 28.5% in May last year. Fixed rate loans as a percentage of all loans issued fell for the seventh straight month, and now account for just 2.5% of the total. While the official cash rate is expected to continue rising over 2010 (we expect a 5% cash rate at year-end), pricing of fixed rate loans will remain prohibitive relative to variable rate loans for some time yet. We, therefore, expect demand for fixed rate loans to remain weak in coming months.

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The value of home loans issued fell 5%m/m in January. Both the quantum of loans and the average loan commitment of FHBs fell over the month, which would have depressed the outcome. On the other hand, average loan sizes for non-FHBs continue to rise, though demand is tracking at a lower volume than in December. Loans for investment purposes pushed up 0.9% over the month, with investors accounting for 30% of all loans issued in value terms.

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, loan demand will face significant headwinds in 2010. With building approvals still sluggish, the last penny to drop is house prices. That said, our forecast is not for house prices to fall this year, but for the rapid pace of house price appreciation to moderate. The undersupply of housing will continue to support house prices, albeit in a fairly undesirable fashion.

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ENDS

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