I have followed the AFG mortgage reports for some time. AFG claims to be the largest brokerage service in the country with about 20% of the market. The figures they produce are only a guide to the overall mortgage market, but previously their reports have matched very closely with the more comprehensive figure from the ABS that have come later. The other thing I like about the AFG is that they report raw data.
I wouldn’t normally discuss January in terms of lending as it is usually the time that the nation falls asleep in terms of credit. But the latest report from AFG didn’t just show sleep, it showed coma. This is how the Australian reported it.
New mortgage growth in January was the slowest for seven years, with home buyers frightened by higher interest rates and the economic uncertainty caused by the southeast Queensland flood crisis.
A report from AFG, the nation’s largest mortgage broker, showed just $1.3 billion worth of loans were processed through its brokers in the first month of this year, 40 per cent down on its usual monthly average. There was a 48 per cent drop in the number of new mortgages in Queensland because of the floods, but business remained weak across the rest of Australia.
The study showed the number of new mortgages in Victoria dropped by 39.6 per cent, South Australia (33.6 per cent), NSW (31.8 per cent) and Western Australia (28.6 per cent).
AFG executive director Kevin Matthews said new homebuyer sentiment remained weak, with consumers fearful of higher mortgage repayment costs, despite lending rates being below the recent averages.
We knew because of the floods that Queensland would be down, but the rest of the country seems to have gone out in sympathy,” Mr Matthews said. “The standard variable rates are around 7 per cent — if you look historically over the past 20 years, that is not that high. On top of that, even the flood levy of 0.5 to 1 per cent, people are having to say ‘let’s factor that in’.
“That is leading to a lot of people saying ‘well, let’s wait and see’. People are being spooked. There is not that level of confidence among homebuyers that there has been in the past, people are now saying let’s be super conservative.”
Consumer demand for credit has weakened dramatically over the past six months, with Australians beginning to save, rather than spend.
The most recent figures showed private sector credit demand rose just 0.2 per cent, while business credit fell for the sixth consecutive month in December.
Housing finance data in November revealed a mixed outlook with a 2.9 per cent increase in owner-occupied finance, but a sharp 2.3 per cent contraction for investment housing.
There is usually a 4-5% drop in raw data from December to January, but the latest report shows a drop of 36.9 per cent, almost twice the previous record, so something abnormal clearly happened this time.
Queensland was the worst affected, with mortgages processed in January down by more than half compared with December.
AFG executive director Kevin Matthews put the falls in other states down to sympathy with Queensland’s troubles.
The Queensland property market had been affected, as may have been expected, he said.
“But the disaster has affected sentiment across the whole country.
“In times of national crisis, people hunker down and put off major buying decisions,” Mr Matthews said.
I do agree that the floods in Queensland would have had some overall effect on mortgage lending, but a 33.6% fall in South Australia due to flooding in Brisbane? I am not sure I can draw a bow that long.
It must be noted as of December 2010 that credit is still growing. However, as I mentioned recently Veda Advantage have been showing a falling trend in demand for many months even before the flooding, and the RBA’s financial aggregates have been showing a falling trend in credit growth for housing all year. Some of this is expected, because as you can see from the chart below Australia’s population growth has also been slowing recently.
I am not so sure however that the floods are the whole picture. In Queensland, the state that the report shows was the hardest hit, the number of property sales has been falling for nearly a year on the back of an already downward trend. I think the floods would have made the problem worse, but it has existed prior.
The question for 2011 is whether the latest data is simply the effect of flooding or whether other things are in play. I have already discussed that it seems that the consumer sentiment towards housing really has turned, as the latest NAB survey suggested.
But let’s not forget the on-going effects of demographic changes in Australia and the introduction of new legislation that began on January 1 that has been mostly ignored by everyone else.
One of the most dramatic things that you can see if you study the report in more detail is that the lastest national LVR value fell 8.4% to 54.9%, the lowest value ever recorded by AFG. In Queensland it fell to 48.4%, a drop of 15% from December.
If you look at the average loan size you will also notice the significant falls in value, again especially in Queensland, but generally across the board.
The fall in the value of loans may be a January trend. But if you take the large swing in LVR into account it suggests that the properties being purchased with these loans are approximately 10% higher in value than December ( 20% in Queensland ) . I cannot find any evidence of house prices rising anywhere near that value over the month, so I can only conclude from this that the type of houses being purchased were more towards to top end.
Does it make sense that the flood scared off the lower end market but not the top ? Or does it make more sense that changes in credit legislation have knocked out the bottom?
It is too early to tell but if the later is true then it will be sustained and the market is in serious trouble.
Either way with a higher proportion of sales moving to the top end on a falling volume market, 2011 is certainly going to be an interesting year for property.