Housing finance data catches everyone off guard.

Whilst there was an expectation that housing finance may ease in January due to the wind back of the first home buyers grant boost and three successive interest rate increases, no one expected to witness such a dramatic fall.

Housing finance data showed that on a seasonally adjusted basis total finance commitments fell by -7.9% and sit at their lowest monthly volume since October 2008, which was right in the midst of the Global Financial Crisis.

Total housing finance commitments – volume

Finance commitments

Source: RP Data, ABS

Across all finance commitment types, the greatest falls during the month were recorded in commitments for the purchase of new dwellings (-13.3%) again October 2008 was the last time these commitments were so low.  Commitments for the construction of new dwellings fell by -3.9% during the month and now sit at its lowest level since July 2009.  Both these types of commitments are essential to adding to housing supply and should ideally be heading north rather than south.

Looking specifically at the owner occupier market, first home buyer volumes are clearly now falling back to historical levels, if not lower.  During January 2010 there were 8,316 finance commitments for first time buyers, the lowest level since January 2005.  Despite the fact that first home buyer numbers fell to their lowest level in five years, the overall weakness in the market meant that first home buyers still accounted for 20.5% of all finance commitments.

For owner occupiers which weren’t first time buyers, commitments also fell sharply by -28.8% during the month to their lowest level since January 2001.

Finance commitments for non first home buyers vs first home buyers – volume

FHB vs Non FHB

Source: RP Data, ABS

The one positive (and it’s only a very minor positive) is that the total value of investor finance commitments have climbed again, for the fourth successive month now.  During January, investor commitments increased by 0.9%, representing the greatest total value of commitments since February 2008.

Total value of investor finance commitments

Investor finance Source: RP Data, ABS

Despite the fact that investor commitments increased, the overall result was extremely poor.  The removal of grants for first home buyers is clearly impacting, so too is a higher interest rate environment.  Whilst we expect that investors will increase during 2010, early indications suggest that if this trend continues they will not be able to pick up all of the slack from a retreating owner occupier market.

From here on it will be very tricky for the Reserve Bank (RBA).  Clearly they would like to move away from emergency interest rate levels to more normal ones, as evidenced by the four 25 basis point increases to date and their own rhetoric within many recent speeches.  However, the RBA and virtually every housing commentator has highlighted the need to add to housing supply.  The trick for the RBA will be returning rates to normal rates without stifling demand for new housing, in particular commitments for the construction or purchase of new dwellings which add to the national dwelling supply.

I don’t envy the RBA’s task and clearly the market remains extremely sensitive to interest rate rises, given this we would not be surprised to see official interest rates increased at a slower rate in the coming months to help ensure that demand is not further adversely impacted.

About Tim Lawless

Tim heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia

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3 Responses to Housing finance data catches everyone off guard.

  1. Andreas Geronimos March 12, 2010 at 12:28 pm #

    Whilst I agree that it is a scary scenario the figures could be indicative of something else. A real lack of quality stock for sale meaning that buyers simply aren’t buying. We’ve noticed a significant lack of stock (for the amount of buyers we have) in inner city Perth. If there’s nothing to buy how are people going to borrow money?

    We are still seeing properly priced properties sell in a number of days, there just isn’t enough of them!

    Perhaps a second graph comparing the number of listings (and time on market) with finance figures would help put the figures into perspective.

  2. Doug Ithier - Vital Property Group March 12, 2010 at 1:42 pm #

    I agree with Andreas, although you have to remember the developers are in a similar situation whereby the funds given to them to bring more stock onto the market have also dried up.

    A lot of developers now have to have 110% of their projects contracted and 10% deposits paid into their trust accounts before the banks will look at them. Used to be only 50% deposits paid (pre sales).

    This results in less stock, more demand for each available property, and obviously a rise in property prices. Great for those who can enter the market or already own property, but not so good for those who can’t enter the market.

  3. Brett Coombs March 12, 2010 at 3:58 pm #

    I don’t think the RBA are too concerned about this. Sure the housing shortage is an issue, but what have they done about nothing. This is primarily because they don’t have the capacity to. It is ironic that the government pumps $100’s of millions in FHOG and the RBA in their wisdom raise rates at a dramatically. The only people the RBA effects are these first home buyers who least afford it. This is how the GFC started in the first place 19 rate rises in a row. Now wonder it went into melt down and we were very nearly there with so many rises ourselves. If the RBA isn’t careful they will give us the “recession we didn’t have to have”. This is just the start.

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