Theories .. Anyone ?

The AFG monthly mortgage report is something I follow. AFG claim to represent between 10% to 20% of the mortgage market and release their raw data every month in a fairly consistent manner. They are a brokerage service so they are able to get their data out earlier than most. As they are not an actual lender their data is not final issuance, but in the past I have noticed that their data is a good front runner for the ABS data that is released a few months later. 

AFG released their latest monthly mortgage report for February yesterday. It has some interesting information and a trend that is a continuation of something odd I noticed last month. 

Increased competition among mortgage lenders has seen the market share of non bank lenders rise to levels last seen before the GFC according AFG Australia’s largest mortgage broker. Non bank lenders comprised around 21% of all home loans processed in February according to AFG data. This continues the trend reported by ABS statistics showing that the market share of non bank lenders increased to 15.4% in the December quarter, double its lowest level of 7.5% in the first quarter of 2009. 

But despite lenders fighting hard to win new customers, refinancing during February comprised 37.0% of all mortgages processed – somewhat less than the average 38.0% for the past twelve months. In addition, the AFG Mortgage Index shows that Loan to Value Ratios (LVRs), the value of loans expressed as a percentage of the value of properties, fell to 53.2% in February. This is the most conservative LVR figure AFG has recorded in six years, showing that mortgage buyers borrowed only around half the value of the properties they were buying or refinancing. LVR figures in the long term have tended to be around mid 60%. 

Overall mortgage sales for February showed that recovery from the summer of disasters has yet to occur, with the $2,053 million of loans processed down 9.7% on February 2010 ($2,275 million). New South Wales was the only state to show a modest increase on February 2010’s figures (2.7%), with mortgage volumes in other states falling by 8.1% in Victoria, 8.8% in Western Australia, 16.3% in Queensland and 22.9% in South Australia compared to February 2010.

The LVR trend is something I commented on last month when I said 

One of the most dramatic things that you can see if you study the report in more detail is that the latest 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. 


The chart above is the loan to value ratio(LVR) trend for each state. You can see that something very significant occurred in January and apart from in the North Territory has not come back towards trend. If you look at the chart for loan volumes and total issuance you can see that the long term downward trend still holds. 


You can also see from the average loan size chart that there has been no significant move from the steady upwards trend. 



There also doesn’t seem to be much of  a change in market composition,  first home buyers are up a bit and re-finance down a little. In fact these percentages are the opposite of what I would expect to see with the LVR falling so dramatically. If you view the average property value chart ( constructed from average loan size and average LVR ) you can see the large swing in the value composition. 


Given that other news is suggesting that the market is “struggling” at the moment it is very difficult to reconcile this data. Unless anyone can come up with a better suggestion I am sticking to my earlier theory that NCCP has wiped out the bottom of the market. The problem with that theory is that if that were true then I would have expected to see a big fall in the first home buyer percentage which is actually the opposite of what has occurred. That however does not change the fact that something very significant happened at the beginning of the year. If I am correct in assuming that the bottom of the market has been taken out then it will not be too long before the whole thing falls in a big heap. Falling volumes on large upward adjustments in price is a big concern , so for the market’s sake I hope someone has a better theory than me.

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  1. RE: NCCP, and massive change in LVR composition only seen since Jan 1, I came to the same conclusion. Its a wipeout for FHB without hefty boomer funded deposits. Like wow !

  2. I have a theory – the housing market is not crashing like everyone keeps predicting on a daily basis

  3. Perhaps the cashed up bears waiting on the sidelines have capitulated? Not me!

    Seriously, there’s no sense in this data.

    We’re assuming NCCP just affects FHBs, but if you read the guidelines there’s now an issue with writing 30 year loans for people who by virtue of their age aren’t expected to be in the workforce for that long. It could impact loan issuance for members as young as Gen X.

    FHB issuance is stable and low.

    The reduction in LVR and growth in average value couple is staggering. How’s that black economy going?

  4. Here is my theory X-1
    a)AFG are reporting on 10-20% of the mortgage providers population – much like RE stats – its all voluntary and open to manipulation – no matter how subtle.
    b) Is it likely that this Bear Rally in the middle of the denial phase of the RE Roller coaster is being pushed by those that have saved and waited and have prematurely ejaculated those savings fearing its a short respite?
    c) The NCCP is driving some new borrowing behaviours and we don’t know what they are yet – every intervention in a systemic model has unintended consequences.
    d) It is the red flag we have been expecting and later today ABS will confirm this.

    Theory X-2
    BK may be right and “we are different” – wallaby wallaby wallaby wallaby!


    ps great stuff BTW

  5. I think you’re right wrt NCCP… speaking with an agent last week and he confirmed that first home buyers have been having difficulty with banks since January…

  6. Could it be that there is difference between the property valuation and purchase price? I assume that a mortgage broker gets a commission on the size of the loan – so there is incentive to get accurate details of the bank issued loan. What about the valuation? At the time of brokering – a property is likely valued using previous sales data, but if the actual purchase price is less than this, does AFG update their valuation?

    For example, a broker tells a FHB he/she can borrow up to $300K.
    The FHB finds a property. The broker/market values the property at $500K.

    A $300K loan on a property valued at $500K is a LVR of 60%. If the property sells for $400K the LVR on the same size loan is 75%.

    AFG reports a LVR of 60%
    True LVR is 75%

    This could help explain the drop in AFG’s LVR.

    • James, as a broker I can assure you LVRs are calculated by the Banks on the purchase price OR valuation, “whichever is the LESSER” (to minimise their risk).

      • Sounds sensible. But my question is whether the AFG statistics reflect this. You say “LVRs calculated by the banks..”. Maybe they do.
        As a data analyst (nothing to do with property), when I see ratio statistics behaving badly, it is usually the denominator rather than the numerator to blame.

  7. James – good point – again just like the poor quality of RE data – AFG report is taken with a grain of salt – lets get back to that ABS data released at 11.30 today – as my teen daughter says OMG.

    I suggest you go fishing DE – your job is done.

  8. Hey Booboo – Carr forecast a 2% increase in loans for the January report in his BS “score”.

    Actual was 4.6% drop.

    Ouch. So yeah, take a lot of reports as grains of salt. Or other white powders.

    Of course, its all because of the floods – nothing else is underway. Right….

    This cashed up unAustralian bear is finding “bargains” amongst the listings, particularly in Dog’s own country, QLD.

    Although I contend there is probably another 10-20% in nominal price declines to go before any sort of bottom, this could take a long time, for most areas.

  9. Ouch – bowing to the Prince – scrape scrape.

    Meanwhile …..inbox filling with real-estate alerts

  10. My theory is that the majority of these loans are being given to applicants to upgrade to a more expensive house, this has occurred as the bottom of the market is thinning out.
    Higher averages on a lower turnover. The First Home Buyers may have tapped out.
    The first signs of the Great Australian Ponzi collapsing?

  11. Maybe buyers sense trouble ahead but still need to buy a home. So, to minimise risk, they are buying with large safety margins in their loans. This would generate a big decline in LVR. Certainly this is my situation, as a prospective home buyer. Anyone agree?

    • As a prospective buyer who really needs to buy a house….yes David I agree. I’ve lowered my limit for safety and will limit my borrowing.

      Incidentally, a couple of local agents have benn telling/spruiking me that “this is a great time to buy” “prices are at the bottom” “prices will be rising soon” blah blah. I have been banned (by my wife) from reacting to this bait as it invariably leads to a “discussion”. Of course, I refer these people to macrobusiness….just to balance the HTW reports they refer to.

      • Funny how similar our situations are. I was forwarded a HTW report by an agent just this week!! My wife has a similar ban in place. Still we would like a house – don’t want to hang on for 12-24 months waiting for the true low. Hard call for us.

  12. Looks as though cash is ‘appearing from nowhere’ pushing up average sell prices and reducing LVR.

    This isn’t another unannounced ‘back-door’ way of getting foreign cash into the market is it?

  13. Could the data be skewed from “mortgage moratoriums” and combine this with bank shadow inventory. I remember an article that stated that banks were allowing home occupiers the ability to market properties through agency of choice rather than mortgagee in possession.

    Falling volume on rising price usually indicates a change of trend in the offing.

    Perhaps we are seeing a competition by high income earners (see below) for trophy assets utilising negative gearing.
    Personally, I have a nephew, late 20’s who is earning $150k p.a. in mine construction. No debt, no rent, no food costs. Only problem is taxation. There are thousands of these young men out there in their 20’s and 30’s.(BTW, they work 70+hrs p.w.). Ditto for those front running the stimilus/infrastructure programs-labourers earning $4k p.w.
    Last of the blow off top or dead cat bounce riders?

    Muddy data at the turn of the tide. When the tide goes out, we’ll see who’s been swimming naked.

  14. The Investors have gone.

    I think investors are being spooked by all this talk of falling values. They normally have high LVRs and lowish value properties (units, smaller properties with no yards etc.)

    The ‘upgrades’ don’t trawl these forums for property information, so are still drinking the Real Estate kool-aide and are still paying over the odds for their primary place of residence. The main stream media are starting print negative real estate articles, so the next month or two will be interesting.

  15. As a major land devleoper (private, not public) with some 20,000 lots on the go at any one time, we are seeing a significant increase in our cancellation rates for FHB. The cancellations are 99% due to “Finance Declined”. In fact 2nd and 3rd HB are also seeing “finance declined” on the rise.
    Naturally my boss has asked me to do the homework on this pretty quickly, but I’m yet to consolidate my research…and this seemed like an OK place to start – even though most bloggers here don’t like my ilk very much 🙂

    • G’day LandDeveloper. Welcome to the blog. It’s not the developers I dislike, it’s the restrictive land-use regulation/zoning, which enables landholders to force-up land prices and developers to corner the market. Under an open land market, developers/builders are a speculators worst enemy.

      I’d be interested in your views on this matter. I can be emailed at [email protected]. Cheers Leith

    • Welcome LD – Ive always wanted to ask this from a land developer but do you guys ever come up with the idea of a “New Urban” style project and if so, why do you end up doing McMansions and ugly suburbs instead?

      Is their too much pressure to just “give the public what it wants”? Does the public actually know what it wants seen as it has never seen anything but “Paradise Rise” or “Treedale Lakes” or some other corny chincky suburban vomitus?

      Or is the idea of New Urban (i.e a complete mix of lots – high density/medium/low and differing houses/apartments etc, mixed living – i.e shops/cafes/offices on ground floor, apartments above – big (I mean big not token) open parks and all connected by walkways and not roads) completely shot down due to economic reasons or other?

      The finance declined thing is very very interesting…Have you looked into the new credit rules that came in since January?

      • Hi Price – I could write an essay on this 🙂 In short, you need to have a pretty big development to “create” a new product for the market. The reason is you have to “creep” innovation into the product mix. When starting out a new development, cash flow is so important that you have to sell what the market wants to bring in some funds before you can risk putting innovative products into the lot mix. Fortunately our smallest project is 3,000 lots with a life of 10 years or so. So we can afford to set aside chunks of land for some innovative products which we do quite regularly. Unfortunately (and this is another essay in itself) McMansions are a big part of the affordability problem and we only have limited control over that.

        I won’t bore everyone here just now, but I can promise you that we actually place a very very very high importance on “community building” and I will try to email something to Leith about my thoughts on how this affects the supply side equation.

        • I know it is all down to our lack of train system – but the German/London style of city growth just seems so much more sustainable. A large portion of development is in existing towns which have established facilities – including train stations. So the ‘new builds’ don’t have to provide the ‘New Urban’ infrastructure – it is already there.

          We keep putting a new estate in the middle of nowhere and have to add schools, shops, transport etc, when developing in Wallan (taking Unconventional Economist example) is actually a much more efficient thing to do if you also upgrade the rail service!

  16. Endrortsonhousing

    Sure it’s not refinancing by existing investors – the banks have been trying to steal each other’s customers.
    I have also heard a few anecdotals about some investors getting a little worried – not worried enough to sell yet, but worried enough to try to save a few bucks by refinancing.