RPData seeks green shoots in the desert

RPData’s latest newsletter is looking for some green shoots in housing finance but I must admit I am having a bit of difficulty seeing them myself. The charts clearly show finance for existing dwellings has flatlined. A point made here many times and ignored in the MSM in favour of boosterish comments arising from a  misreading of the refinancing boom. I do, however, notice that market churn theory gets a bit of a mention which is something new from them as far as I am aware:

With property values falling and transaction volumes running below average, it is surprising to note that the number of owner occupier finance commitments has risen over the past five months. So what does this mean for housing values and volumes?

The Australian Bureau of Statistics (ABS) releases housing finance data each month. The most recent data to August shows that the number of owner occupier finance commitments has increased over each of the past five months and the total value of commitments has risen over four of the last five months.

The number of housing finance commitments to owner occupiers rose by 1.2% in August and has increased by 6.2% over the year. Although these figures are encouraging, most of the increase is due to refinanced loans. In August, refinances increased by 1.7% compared to a 1.0% increase in non-refinances. Although both refinances and non-refinances have increased over the past five months, refinances are up 24.9% whereas non-refinances (ie. new lending for housing) have increased by a lower 7.8%. Note that the thick red and black lines in the graph indicates the 12 month moving average.

Focusing on the total value of housing finance commitments which includes both investor and owner occupier commitments, owner occupier commitments rose 0.6% in August, investor commitments rose by 1.8% and overall commitments increased by 1.0%. In value terms, owner occupier finance commitments account for almost 70% of all commitments compared to 30% for investors. Once again, when you strip out refinance commitments the figures are not as strong, with the total value increasing by just 0.1% over the month. The total value of refinance commitments rose by 29.3% over the month. Refinance commitments also accounted for 22% of the total value of all housing finance commitments in August.

The results of both the volume and value of housing finance commitments show that there is certainly significant activity in the refinance sector in the current market.

Stripping out the refinance data is very important for the housing market as it is not reflective of a new property transaction. Of course brokers earn commission on the transaction and money changes from bank to bank but for real estate agents and property developers it does not reflect any new business. The total value of refinance commitments has risen by 29.3% over the 12 months to August 2011 whereas the total value of all loans excluding refinances is actually down by -1.8% over the year.

Many often speak of the growth in housing credit over recent years and its impact on the housing market. As the third graph details, the correlation is particularly strong, especially when refinances are removed from the equation. With the total value of housing credit falling by -1.8% for the year (excluding refinances), the prospect of any substantial improvement in values seems unlikely while these conditions persist. In fact, values across the combined capital cities have fallen -3.9% below their peak, compared to a fall from the peak of -23.2% for finance commitments excluding refinances.

Sales volumes also have a strong correlation with housing credit. The fourth graph highlights the annual change in housing credit (excluding refinances) against the annual change in sales volumes across the country’s three largest cities. This is a logical correlation: if there is demand for housing finance there will be demand for the buying and selling of homes. At the moment demand is quite weak and as a result, sales volumes are also weak.

Although the data looks like bad news for anyone in the residential property sector it is not all bad. As already mentioned, finance commitments for both refinances and non-refinances have increased for the past five months. In annual terms, the total value of housing finance commitments with refinances removed has fallen by -1.8% over the 12 months to August. However, the annual decline reached a trough of -15.8% in April 2011 so it looks as if things are starting to improve, a little. Many experts are now forecasting that the next move in interest rates will be down. If these forecasts do prove correct, there will be some improvement in housing affordability and there may be some improvement in demand for housing finance. Of course any improvement emanating from such a situation will be counterbalanced by the fact that jobs growth has slowed, consumer confidence remains weak (despite the recent September and October improvements in the index) and the propensity for households to spend is low with savings high and retail trade weak.

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  1. More figures indicating a “slow melt”. Not seeing any evidence that the market is about to “tank” nationally but housing won’t return to growth territory either.

    Of course I’ll add the standards caveats about a Euro implosion, interest rates and government intervention.

    • Yes that is pretty much the case for Melbourne. Expect house prices to come back a little, maybe as much as 10%.

      But in the rest of the country, new home buyers are coming back. It won’t be a surge, just a rise. Still a rise not induced by stimulous means no crash in sight.

      Wait for a change in interest rates, then a clear direction may be more evident.

  2. One agent I know in Melbourne said they were selling six houses a month, and it’s now one a month. It’s going to be interesting to see the figures in a few months. The auction results in Melbourne two weeks ago 56 properties sold, and this last week 83, so for a city this size it’s very low.

    • You’re reading it upside down.

      This is one metric that I (try to) follow very closely. It’s hard to get accurate numbers, but residex release good numbers about a week late (for Sydney only). The trend is ugly for PIs.

  3. Could you point this out? I haven’t seen any evidence of a sustained rise in clearence rates. I don’t know about volumes but the property bulls on other forums haven’t made any excited comments about rising volumes lately either.

    • The BurbWatcherMEMBER

      Check out http://www.burbwatch.com.au, chart 13 in all sections.

      You will get a feel for the recent “rises and falls”.

      Some states still on downward trend, some flatling (on trends).

      (Disclosure: yes, that is my own site)


      • It’s not the auction clearance rate, but very interesting anyway. Shows a clear downtrend in most major markets, along with lots of volatility.

        In an ideal world, this would be a much better indicator of clearance rates, imho. The only question I have with it is the source of the data, realestate.com.au. In my experience, their sales data is a bit hit and miss, as to when sales are included, or not. I guess that this accounts for the high variability in the data.

  4. SQM’s Louis Christopher earlier this year (or last) estimated that 38,000 Owner Occupier loans was roughly the level required for a flat national market. We’re still just over 10% off that, and have been for about a year. With the lag effect of housing finance commitments to sales there’s no chance of prices picking up soon. If prices are an indication of demand then outside of Sydney demand must be through the floor.

    Until FHBs come back things are going to remain subdued.

  5. Would it be possible to break down the refinance demographic.
    My bet is this represents the baby boomers upgrading thier house to accomodate for retirement.
    Staying close to family and infrastructure preferrable than moving away.
    Sure their will be a few easing cashflows as well.

  6. I was trying to understand the real estate market and finally worked my way to these big boys. col joye dislikes steven keene. prefers data to theories. but they can’t even predict short term movements here. even their moving averages are just what Keene alludes to!

  7. if new sales are down why are real estate agents giving me such promises that my place will sell for even more?