Has the debt tide turned ?

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.


  1. Of course Queensland would have a slow down in economic activity due to the floods. Queensland also appeared to be slowing before this (huge) catastrophe. Previous articles from “Delusional Economics” and few other blogs were demonstrating this.

    It maybe for those other reasons that other States were experiencing a slow down in mortgages. I have noticed in Sydney too the top end is still performing, not all of it though, still *nice* houses in the Eastern Suburbs that have been for sale for a long while now (Want to buy a 2 bedroom semi for $880,000? Well the owner wanted more).

    Maybe the debt tide is turning on Mortgages but on Credit Cards, and things like Joyce Mayne, Harvey Norman,… finance, don’t know, it looks like Australians are still going in hard with that stuff.

    I think it will be an interesting year, and we’ll get a better idea of the big picture early on in this year. I reckon there will be a large amount of credit up for the taking (more like borrowing) mainly cause China is about to have (or is having) a huge credit explosion, over 1 trillion Pound Sterling I think it is.

    May I ask MacroBusiness, “Will the debt tide turn”?

    • I’m interested to know where you think the Chinese credit boom is going to come from?

      I’m not saying I do or don’t believe this (China = central regulation = corrupion = everything is possible) but the amount of money printing there and cheap credit issued over the last few years is absolutely incredible.

  2. Good article and information, thanks.

    A user (minimumtrade) on a credit crunch forum (finance/housing related topics) provided this chart:


    It’s raw figures showing monthly mortgages written by AFG for the past 3.5 years. You’ll notice that every January shows a large slump in borrowing, but my interest was in the overall trend for the last 2 years. Lower highs and lower lows, this is an example of a technical downtrend. Let’s see what happens over the next few months.



  3. Maybe all the people at the bottom end of the market who are brave enough to take on a mortgage already have one. The rest are either too scared or too sensible.

  4. Bullion said:

    >It’s raw figures showing monthly mortgages written by AFG for the past 3.5 years. You’ll notice that every January shows a large slump in borrowing, but my interest was in the overall trend for the last 2 years. Lower highs and lower lows, this is an example of a technical downtrend. Let’s see what happens over the next few months.

    Yep I am well aware of the January effect. As I said in the post, I wouldn’t usually talk about January for exactly that reason. The fact that it is January and there was a flood can easily explain away the volume and the dollars. But they don’t so easily explain away the never before recorded drop in LVR.

    A change in LVR of this magnitude without large fluctuations in house prices shows that the make up of the market has changed. This is not a normal January effect.

    So what else happened in January? Well yes there was a the flood, which maybe you could explain away Queensland with, but can you really say that because of a flood in Queensland a higher proportion of high end homes were sold in Adelaide than usual ?

    Maybe you can?

    On the other hand on January 1, there was also a legislative change that meant that lenders could no longer lend to people unless they were able to ACTUALLY prove that they could pay back the loan, independent of the expected capital gains.

    Does this explain the LVR pattern better?

    If so then the flood is hiding the real driver, something that isn’t going to go away when the water does.

      • From what I have heard the new legislation is going to create issues for anyone with a non-permanent income stream , lower income earners, people trying to get reverse mortgages and people with interest-only loans trying to re-finance or adjust their mortgages.

        Given that a large proportion of these people will be baby boomers near retirement I want the water to stay at the level it is thanks.

        What is seen cannot be un-seen 🙂

      • Curious. From where have you been hearing this and can you provide more detail, possibly even some examples? Because I’m still scratching my head regarding how this legislation will impact the mortgage industry.

        And I keep looking at QLD’s January LVR number wondering exactly what it means. It’ll probably be a few months before we get a clear idea.

      • I am not 100% sure but I think Sean is referring to the impact of the new legislation on the legal ramifications for lenders.


        Chapter 3 is the important bit in terms of lender standards.

        The overall legislation basically says

        1 ) that the lender must give the client a complete list of all of the charges they will incur for the life of the loan product.

        2 ) They must “prudently” investigate the clients history and their ability to pay back the loan; and if requested provide the client with a copy of that assessment.

        3 )Not offer a product to a client that is inappropriate or a product that was not actually asked for in the first place.

        If they do any of these things then ASIC can turn up in a black SUV and drag them off to jail..

        I think the kicker is 2) because it does two things.

        a) provides documented evidence to the client that could have a legal recourse if they are found to be unable to pay back their loan sometime in the future.

        b) requires the lender to actually obtain valid documentation of the clients income stream.

        The issue about reverse mortgages and interest-only loans is the legal definition of what “ability to pay back” actually means.

        I do not think this will be a problem for the big banks, I assume they already do all of the checks anyway, but for the lenders at the edge this could present a risk issue. AFG is a brokerage service that would use multiple lenders, not just the big 4.

        >And I keep looking at QLD’s January LVR number wondering exactly what it means. It’ll probably be a few months before we get a clear idea.

        Well I know what it means,( I said it in the post) I am just wondering if it is a permanent thing or simply a one off. As you say we will need to wait a few months to find out. ABS data for Jan isn’t out till mid march, but if it is having a real effect we are sure to hear screams from the RE lobby before then

  5. Love how the media stories around this seem perplexed by the lull in lending, because interest rates are still not historically ‘high’. Funnily enough though, no mention of the extraordinary prices which amplify the impact of (even low) interest rates in dissuading people from taking on a debt burden.

    • Yes, the co-option of the mainstream influential press by vested interests in our society is a story in itself. They’re clearly generally not stupid people or vacuous thinkers (or maybe I overestimate economics journalists), so you can only suppose they have their copy written for them by the industry to delude the masses.

  6. Hi,

    Regarding the drop in LVR etc, wouldn’t a more sensible hypothesis be that the loan values and lvg afg report is due to remortgaging, rather than

    “…the type of houses being purchased were more towards to top end”

    When a property is remortgaged, there will likely have been some principle paid down but also the home price will have probably increased somewhat (eg last 5 years). With rises in interest rates on the horizon and being jawboned for much of late 2010 it is my guess that mortgage holders jumped into fixed rates and better deals, or first home buyer/up-grader simply made up a smaller percentage of the overall market.