Australian housing finance is boomingā€¦ but can it continue?

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
(AMP Capital)

 

What the data is saying

According to figures from the Australian Bureau of Statistics (ABS) , the total value of new loan commitments for housing and within that, the value of owner occupier home loan commitments each reached record highs last month.

Some key figures include:

1. The total value of new loan commitments for housing rose 8.6 per cent to $26 billion (seasonally adjusted.) This represents a 31.2 per cent increase on December 2019.

2. The value of new owner occupier home loan commitments rose 8.7 per cent to $19.9 billion. This is 38.9 per cent higher than December 2019.

3. The value of owner-occupier approvals for existing dwellings rose 4.0 per cent, while approvals for new construction rose 15.3 per cent.

And this chart gives an idea of the patterns with Australian housing lending, excluding refinancing:
Sources: ABS, AMP Capital
Sources: ABS, AMP Capital

Why the jump?

The surge in housing finance, like the rebound in home prices, is being driven by a combination of a few factors. This includes record-low mortgage rates, home buyer incentives and economic recovery.

It also seems consistent with further gains in house prices ahead, as these loans are drawn down and listings remain relatively low

 

But, can it continue?

Right now, the rate of growth in total housing related debt is modest ā€“ with RBA credit data for housing debt showing a rise of 0.4% in December and 3.5% year on year ā€“ because existing borrowers are focussed on rapidly paying down debt and the housing finance commitment data leads the flow of new credit with a lag.

However, the RBA is likely to be starting to get a bit more concerned given the pace of the rebound in lending commitments and house prices, albeit itā€™s not that concerned at this stage as there is not much evidence of a deterioration in lending standards yet.

At the very least, it would make sense for home borrower incentives to be wound back in the months ahead and not extended. If housing credit growth accelerates significantly, I think we may see a renewed tightening in lending standards by year end or early next year. As was the case a few years ago, tighter lending standards rather than rate hikes are likely to be the RBAā€™s preferred path at least initially as it will likely remain premature for the RBA to start raising interest rates or ending bond buying entirely, considering continuing uncertainty and spare capacity in the wider economy at least out to the end of next year.

1 https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release

 

Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)Ā  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investorā€™s objectives, financial situation or needs.

 

 

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