RPData has seen the light. For the first that I can recall it has stepped outside of simple supply and demand arguments for house prices and provides a downbeat assessment based upon rates of credit issuance:
The Reserve Bank’s private sector credit numbers for June 2011 showed the lowest level of annual growth in history as the banks tighten their purse strings and consumers focus on saving rather than taking on more debt.
The monthly private sector credit numbers for June 2011 were released by the Reserve Bank (RBA) last week. The data highlights the amount of outstanding credit for the private sector. Of particular interest is the housing credit data.
Housing credit is broken into two parts: owner occupier and investor credit. Total housing credit grew by just 6.0% over the 12 months to June 2011, the slowest annual rate of growth in housing credit over the length of the time series which dates back to January 1991. Owner occupier credit increased by just 6.5% over the year and investor credit grew by 5.8%. Annual owner occupier credit growth was the lowest in history while investor finance growth reached a low of 2.3% in October 2009.
The limited growth in credit is indicative of the response to the Global Financial Crisis (GFC) by financiers, having tightened credit requirements for home loans. It is also representative of the higher interest rate environment resulting in lower home loan demand and consumer caution which is resulting in home loan owners paying down debt.
The annual growth in housing credit across Australia has actually been easing ever since March 2004, which was also the time the housing boom of 2001-04 was starting to run out of puff. As the graph shows, ever since private sector housing credit peaked the rate of capital growth in property values has also been slower.
The most recent RP Data-Rismark Capital City Home Value data is to June 2011, 74 months since housing credit began to fall. Over this time, home values across the combined capital cities have increased by a total of 40%. During the preceding 74 months, capital city home values increased by a total of 97.4%. The evidence certainly suggests that as growth in housing credit slows so too does the rate of property value appreciation.
Although a decline in housing credit is likely to result in lower levels of home value growth, there is no precedent that it will result in substantial falls in home values.
What is a likely result of lower growth in housing credit is a lower number of housing transactions. When the volume of home sales in the three largest cities (Sydney, Melbourne and Brisbane) are plotted against the annual change in housing credit you can see that volumes have been trending lower since growth in housing credit peaked during March 2004.
Obviously this changing market dynamic is going to have an acute impact on home owners and property professionals.
Home values are unlikely to grow at a similar pace to that which they have grown in recent years. It is important to note that this shift has been happening without much notice in recent years. Over the past five years, capital city home values have grown at an average annual rate of 5.5% compared to annual growth of 7.1% on average over the decade. So clearly the last five years have recorded a much slower rate of capital gains than the preceding five years. Lower rates of capital growth mean less equity in homes and as a result less housing market speculation. In-turn, we will likely see fewer investors actively looking to invest in property unless rental returns climb markedly from their current levels, providing opportunities for positive gearing.
For property professionals, fewer transactions coupled with lower equity levels is likely to result in less commission and lower demand.
How long will these conditions last? Who’s to say but affordability is an issue and not one that is likely to be improved upon quickly so these conditions are the new normal with property values likely to grow more in-line with household incomes going forward. The banks have stated that consumers will have to get used to lower levels of credit after the GFC, now obviously that won’t continue forever but a restricted credit supply is likely to remain for a number of years, especially while debt problems persist in many economies.
Well, that’s progress. But if they had only bothered to use the data I had previously mentioned in the ABS’s 5609 and 5671 datasets then it would have been less painful. In overlaying their own Brisbane house price index chart (top) with the owner occupier credit issuance data for Queensland from the ABS (bottom – black line is 12 month trend ) they would have found an image like this.
If they then combine that with their own words…
the banks have stated that consumers will have to get used to lower levels of credit after the GFC, now obviously that won’t continue forever but a restricted credit supply is likely to remain for a number of years
Then they may have thought twice about stating…
… as growth in housing credit slows so too does the rate of property value appreciation. Although a decline in housing credit is likely to result in lower levels of home value growth, there is no precedent that it will result in substantial falls in home values.