Carrion comfort

As usual, the media is beating housing finance data to death with a feather.

It’s nothing personal, and this blogger could have thrown a dart to choose which overly-bullish article to deconstruct, but Adam Carr goes further than most so he’s up for a flaming. Using the new ABS housing finance commitments data, Carr argues the following:

As the chart above shows, the number of loans remains well below what a simple linear trend (representing population growth etc) suggests we should be at. Note, however, the speed at which loans rebounded in the second half of 2010. They’re up about 11.5 per cent over that period, which seems to confirm my view that it was the pace of rate hikes earlier in the year, rather than the level of rates, which spooked potential buyers. That and the fact that doomsayers were having a field day telling you the world was about to end – Europe falling into a sink hole and the US double dipping, etc.

This is a pretty decent signal (as an interest rate sensitive sector) that all of this talk of a downturn and cautious consumers and all that, is, well, just talk. Loan growth slowed, there is no doubt about that, but it wasn’t the level of rates or new found conservatism that held things back. It was fear or a lack of confidence – remember the news flow last year, think back to that, because it weighed heavily.

Fair enough, this blogger supposes but let’s take a look at another chart from the ABS. This time it’s the household savings ratio:

Does that look like a 2010 news-cycle related shift in sentiment to you?

That’s not to say that consumers won’t grow more confident over time and there was an uptick in the aggregate of mortgage debt being approved for purchase of existing dwellings in December. Unexpectedly, it’s now running at around 2006 levels.

But it gets quite a bit weaker if we look at the number of loans being approved for established dwelling purchases, which are running at around the same level as 2004 or 1999, depending on your poison:

Without putting too fine a point on it, there is an internal discrepancy of fewer loans at higher totals per loan, suggesting significant affordability pressure.

One point this blogger does agree with Carr on, is that a test lies ahead. With the RBA on pause, it’s possible housing will bounce. To get some early indication of whether the RBA’s hold has an effect, this blogger asked the good folk at RP Data for the last couple of weeks of clearance rates:

Red is last weekend, preliminary and subject to revision. Nonetheless, we do have something of a bounce here. Or, at least, a dragging, drunkenly, off the floor.

Let’s be bullish, as they say, and assume it continues. Rates will rise sooner than currently expected (the dollar jumped today and maybe the less dire housing data was part of why). Of course, that will choke off both housing and consumption once more.

Carr is contradicting himself in being bullish on rates and consumption.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. I agree with Carr’s conclusion about the pace of rate hikes having a definite impact on the market. A message of “Rates on hold… for now” seems to make those who can afford a place bolder with their borrowing while even a couple of consecutive rises can make the fence sitters extra sheepish.

    The one thing that gives this aspiring home owner hope is the fact that the RBA appears to want housing to stagnate, give or take a bit. If this market does start running ahead of inflation I expect a couple of sharp rate rises, Glenn Stevens appearing on Sunrise and more articles from CJ arguing why the RBA shouldn’t target asset prices.

  2. It’s just me commenting on a single point. Agree with the rest of your article too. Some bulls would probably use the sudden up-tick in today’s flower sales to claim that the economy is in awesome shape and consumer confidence is bouncing back.

  3. Considering real interest rates are at near historic lows (if real wage growth data and CPI is to be believed), I can’t see how the bullish BS brigade can equate that with “consumers concerned over future rate rises”.

    So the consumer is on one hand very robust (just lacks confidence) and everything is hunky dory, but on the other hand, the consumer can’t withstand a possible 25-50 basis points increase in very low mortgage rates at supposedly full employment figures? (if you believe NAIRU and the whole “5% is full employment”, I have a bridge to sell you)

    And I have to laugh out loud at Carr’s “simple linear trend” line – this is the epitome of conventional economic thinking. Can he even see that a peak was reached in 2007/8 and that the exponential trend change is now negative (if you smooth out the volatility)?

  4. Endrortsonhousing

    Trying to draw any kind of valid conclusion from published auction clearance rates is like trying to nail water to the wall.

    I have given up on using the published rates in Canberra and work it out myself (easier to do in a small city with only around 25 – 40 auctions per week – much harder in Sydney or Melbourne). The rates I have for Canberra in the last three weeks are 20% for 29 Jan; 27% for 5 Feb, and 20% for 12 Feb. My methodology is simply to compare the properties scheduled for auction and the listing for those properties in the following week.

    Try this blog for a discussion on the same issue in Melbourne, noting the apparently common practice of scheduled auctions not appearing in the results (regardless of the publisher) for a variety of weird and wonderful ‘reasons’. As different outfits exclude different scheduled auctions, the clearance rates in Melbourne for the same weekend can fluctuate wildly depending on what is in or out. The blog is appropriately titled ‘theatre of the absurd’:

  5. Carr is contradicting himself in being bullish on rates and consumption.

    Adam Carr is bullish on everything so this is nothing new. Carr is bullish on commodity prices and the China growth story as well, even though record commodity prices must surely slow China’s growth eventually. Well … that’s what I would have thought, but the best brains in Treasury think otherwise, so what do I know?

  6. The whole damage being done is central command…get rid of the interest rate setters, let the market set rates and demand more interest on their $ when they move it out of banks, and back the currency with gold or silver or oil or sometihng, what a joke. Im starting to beleive the conspiracy people.

  7. “Without putting too fine a point on it, there is an internal discrepancy of fewer loans at higher totals per loan, suggesting significant affordability pressure.”

    With fewer potential borrowers now qualifying for loans in the wake of the new responsable lending standards introduced early last month, it makes sense that this is the probably the case.

    Probably just more investor activity.

    • Will the new legislation break apart new loans and people who refinance?
      Also, Is there an ABS stat for home sales in a month?

      If we have a home sales stat (probably from State Govts, the amount of Stamp Duty’s applications processed) would give a good indication of how good the mortgage market actually is.

      With these ABS stats even if nobody buys a house in a month, BUT 10% of the mortgage holders move, that stats will still go up.