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.