AFG: falling mortgages, rising FHBs

Yes OK,  I know I said I was giving up on AFG last month, but after I posted that piece two readers, Merovingian and Peter Fraser, gave me some feedback that suggested I should take another look at the data to compare its trend with data that is released by the ABS.

So I took some time over the last month to build up some charts comparing the historical AFG data with data from the ABS 5609 and 5671 datasets in order to determine if the trend from the AFG data matches that from the ABS. The reason to do this is because the AFG data is released 6-8 weeks before the ABS data appears and therefore if it is determined that the AFG data is trustworthy in terms of trend then it may be a reliable source to judge how the housing market is doing well in advance of the actual data releases from lending institutions through the ABS.

For those who haven’t followed my previous episodes with the AFG data, I am a little hesitant about its reliability because of a unreported data revisions that occurred back in July this year and also because this data is raw and therefore does not compensate for seasonal adjustments or changes in the market share of AFG.

But, as I said above, I took some readers advice and gave AFG the benefit of the doubt… So to the charts…

The following are comparison of the AFG loan volumes issued for each month against the issuance of credit to owner occupiers for existing houses(ABS 5609) and investors(ABS 5671).

Firstly, at a national level: (Click for larger image)

For New South Wales:(Click for larger image)

For Victoria:(Click for larger image)

For Queensland:(Click for larger image)

And finally, for Western Australia:(Click for larger image)

So it would seem , except for a brief period in mid-2009, that the AFG data is actually a fairly good leading indicator for the trend in credit issuance towards housing. That being the case I must admit that I was wrong, and thanks to Merovingian and Peter I will be adding the AFG data back into my toolkit. Having said that, I am still hesitant to trust some of the qualitative data due to my previously stated caveats and also because I think the sample size for some of the groupings in the data is a little too small. However, having run through the exercise it does seem to be the case that the AFG dataset is a fairly good leading indicator of where the housing market is heading.

Given this, it looks as though the next two months of data from the ABS is going to be negative, with some stabilisation in NSW and VIC and further deterioration across WA and QLD. Obviously this is only demand-side data and you will also need to reference supply statistics to get the whole picture across each state. This is especially important for Victoria where it appears supply has gone mad.

The latest report from AFG was published  yesterday and according to them we are seeing a return of the first home buyer. As I said above I am a little hesitant about reading too much into this data, but it does suggests that lower prices and/or the expectation of lower interest rates has stimulated lower end demand.

First Home Buyers are returning to the market in greater numbers than at any time since September 2009, according to AFG, Australia’s largest mortgage broker. The AFG Mortgage Index shows that First Home Buyers comprised 16.4% of all loans processed – a 40% increase for this buyer category compared to October 2010 when they comprised 11.8% of the mortgage market.

First Home Buyers were particularly active in NSW, where 21.1% of home loans were arranged for them in October, as well as QLD (17.9%) and WA (17.3%).

The full report is below.

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  1. DE, Those graphs are way too big. I mean I can still read their titles.

    Sorry about that, but I get frustrated when people go to all the effort of graphing data (as opposed to presenting it in a table) and then make them so small that you can’t easily interpret them because of their tiny size.

    This is normally so that the article will meet page limit requirements, but what is the reason for doing it on a blog?

      • Thanks for sticking with it DE. The AFG figures will always have an elemnet of noise, because market share is never constant, but is is stable enough to get the trends.

        I was thrown last time because someone mentioned that AFG only settled about 40% of their approvals based upon the size of their loan book. To answer that question, AFG are also mortgage managers, and they have a loan book for all of the loans that they have processed and approved themselves, funded by warehouse funders – ING and Adelaide Bank – but that probably represents only about 2% of the loans written by AFG brokers, who traditionally place about 80% of the business with major banks.

        So for those who care about such matters, there is a difference between a loan book and a trail book, and the difference is significant.

        DT also asked why more data isn’t available – exactly what do you want – it may already be available.

        The graphs show pretty much what I would expect, thanks for that. Question – how closely do they align if the AFG figures were retarded by 1 month – would it be more closely aligned due to the time difference.

        As for the data – I’ve been busy all day and have just looked at them now. My initial reaction is that I’m a little disappointed as the numbers have fallen, so it’s not matching my expectations. What we do have though, is a chance to compare the December release (November figures) with this release, and see what effect a rate cut will have. Considering the date of the cut, we really have a whole month of that cut to take into account. Probably a 90% effect.

        The fhb percentage went up, but the overall numbers went down. That actually calculates out to be a vey small fall in FHB numbers, so I don’t agree with the headline – a fall off in investors probably a more accurate headline.

        I’ll have a closer look tomorrow if I get time.

        Thanks again.

        PS – Merovingian where are you?

        • >As for the data – I’ve been busy all day and have just looked at them now. My initial reaction is that I’m a little disappointed as the numbers have fallen, so it’s not matching my expectations.

          Yeah.. the long term trend in Qld’s data looks like it is holding onto the downward slope. As you say December’s release may give us a hint if the .25% had any effect.

          • Qld will be hard to read on the AFG figures. The FHB numbers actually did rise in Qld, and I can believe a scenario where prices are rsing slowly in Brisbane but still falling on the Gold Coast, Sunshine Coast, Hervey Bay, Cairns/Port Douglas areas.

            Qld is more decentralised than other states.

            Even within Brisbane suburbs will be moving in different directions.

          • I agree Qld is hard to read. There are some strange things going on.

            The AFG data shows increasing LVRs which is strange against decreasing property values where the same deposit should be comprising a greater proportion of the value, but it’s gone from around 62% to 68% in 12 months. Does this mean the last of the suckers with the smallest deposit are getting in? I’ve seen a lot of that on the ground.

            Then there are some suburbs that have absolutely fallen off a cliff, like Chapel Hill, prices are down around 25-30%. It used to be $550K-$700K for 3 bed 2 bath, now its $380K-$450K from the sales I’ve seen.

            And there are mortgagee sales on amazing places ( How do you have an income big enough to get a mortgage for this kind of place but not have enough sense to sell out if you fall to service the loan? (They must be greek?) Anyway, it’s certainly not just rudd-prime that are having problems and that’s while employment is still strong.

            But then the last RPData was stronger (admittedly after a massive revision of the previous month).

            I felt I knew what was coming earlier in the year, now the difference between north lakes (holding value) and chapel hill (off the cliff) has me baffled.

    • As a first home buyer I am definitely staying on strike. Why buy now when prices are coming down and the global economy is getting worse. Better to be mobile and ready to move in order to stay employed.

    • Many FHBs haven’t seen price drops like this. There is also a point where it becomes viable to buy – some areas are getting this way.

    • Not sure what they are thinking.
      For a potential FHB with a smallish deposit I would say
      With a 10-15 % deposit home ownership means that they are effectively renting their house from a bank for 20 years or so.
      Interest rate money is dead money just like rent paid is dead money. The larger the mortgage, the more you lose.
      During times of uncertainty renting allows you to choose between investment options and allows you to move if needed. Selling a house in a falling market can be very difficult and stressful.
      If you have a 40-100% deposit, two secure income streams and find a place you love, then it sounds pretty good to me.

  2. What’s with the massive jump in fixed interest mortgages in the last couple of months? Indication that people getting loans think interest rates on the rise? Doesn’t seem right…

    • The BurbWatcherMEMBER


      Why on earth would FHBs be getting in in the last 2 months?

      The only thing I can think of it they are seeing some price reductions (which definitely are occurring).

      Else, why, oh why?

      • In NSW the number of FHB applicants will have been boosted by the impending cancellation of FHB stamp duty benefits.

        More generally, it’s now been a few years since the last big surge in FHB applicants, brought on by Mr Rudd’s largesse. So a new crop of buyers has had time to save a deposit.

        I’d note that the surge is in the percentage of total loans offered to FHBs – in a flat/declining mortgage market, this doesn’t mean a surge in the raw number of FHB applicants…..

  3. You mention stabilisation in Victoria and NSW. While I see a shallow down trend in NSW coming up from the AFG data, the VIC data shows accelerating deterioration.

    I might also add that only ~16% of home purchases being to first home buyers is shocking. Even if it is up from 12%. It just goes to show how this country has sacrificed young people if most purchases involve investors and people trading up.

    I really hope Europe/China blows up soon. Aspiring home buyers shouldn’t need to wait long, or be stuck in a crushing mortgage in order to own a house. Sure some may lose their jobs but it’ll happen eventually so it’s better than a whole heap more getting into a crazy mortgage and then losing their job and everything else later.

    • “I really hope Europe/China blows up soon.”

      Any thoughts or concerns re the devastation either or both events would cause to the lives of millions of Europeans and Chinese (and others). A bit excessive I would suggest, particularly it appears the sole desire for this implosion is to hasten home ownership for some Australians…

      • home ownership – something many Europeans and Chinese never have the opportunity to attain in the first place…

      • I know there will be pain and it will be devastating. It is the fault of years of Government policy which sold everyone’s future for debt-fueled growth. Now it continues to sell everyone’s future to buy an extra week or so of stability. It also tries to convince everyone that the key to recovery is more debt and mindless consumerism. This implosion has to happen sooner or later. The longer it is delayed the more people will end up suffering.

        I gave an example, where people could either:

        1: Lose their jobs after dumping their savings and most of their wages into buying and paying for a mortgage for a year, or;

        2: Lose their job now and at least having some savings to fall back upon.

        Entire countries are being asked to suffer years of austerity when they will fall apart anyway. Why torture before allowing rebirth?

        So I stand by my wish for Europe or China to blow up. It’s a simple wish as it will happen eventually. However, the bigger wish is that Governments learn from this and ensure that there will never again be growth fueled by debt or speculation. That’s a dream which I am afraid will never be realized.

        • Yes, better sooner than later. The longer we wait for the housing correction the more pain we will suffer.

    • Be careful what you wish for Phroneo, because if that comes to pass hundreds of millions of people will suffer.

      Sure house prices will come down, but whats the point if you dont have a job?

      • Totally agree Prince. If anyone wants an example, take a look at Ireland. House prices have dropped in the region of 50%, but people are
        a) scared from the drop to want to purchase again,
        b) have no job or are afraid of losing their job to purchase again,
        c) cannot get a loan due to very strict requirements for borrowers
        d) unable to get credit as the banks are unwilling and unable to lend themselves
        e) suffering from a combination of some or all of the above

        Be careful what you wish for indeed.

      • I’m sorry if my wish seems cold hearted or extreme but I cannot see a way out of this crisis, especially since the medicine is a mix of austerity and encouraging more debt. Every solution fixes none of the underlying problems, but seems to throw up additional issues to solve at a later time.

        The way I see it is everything Shay said happening now, or all of it happening later times 2. So to me, my wish is simply the lesser evil. My bigger wish I stated earlier.

  4. Not sure that it’s a ‘choice’ thing 3d1k except for perhaps sooner rather than later. That said I would not care to lay too many bets about China one way or the other. Can it save us again? Maybe….they have plenty of paper USD that they simply want to get rid of. I imagine they’ll get rid of a fair amount of it here.

    • True flawse, but as I saw Jim Chanos explain foreign reserves have been purchased from exporters using Yuan.

      So those reserves do have local currency consequences…. I think ?

      • Pleasaed you asked that question….my answer is ‘I dunno!’ 🙂

        Thinking out loud!!!!
        I THINK yes their ‘Reserves turn into Yuan! (netting and coagulating a whole lot of other stuff like overseas investments etc)which just leaves the Reserves to deal with. So the USD reserves do have an offsetting yuan issuance.
        On the face of it this would normally need a rise in interest rates to mop up. In the Chinese case their propensity to save probably means interest rates can be lower.

        OTH their Banks are probably creating so many Yuan it may not matter in the big scheme of things…except in the very long term.

        In China’s case their excess credit clearly does not end up as a CAD…so it is still in their economy….somewhere. Going round before it ends up back at a bank it is obviously sending RE to the moon relative to their incomes.
        It is also causing inflation in other areas that’s sure.

        It is also creating lots of real stuff. Michael Pettis argues that they are over-infrastructured given the stage their economy is at but again the Chinese think in a different time scale to the way we do.

        Anyway i start going round in circles!!! In summary though I think their high saving rate saves them from a lot of things that would hit us.

  5. Sorry! Re the topic..Thanks DE interesting graphs. My immediate thought on looking at them was so a .25% or .5% drop in rates may just pump this whole thing up again.?

  6. Some really important things that AFG failed to mention:

    1. The number of First Home Buyers is actually LOWER than last month. They represented a larger proportion of all buyers (16.4 compared to 15.7 per cent), but of the total number of mortgages that’s 1041 FHBs in October compared to 1049 in September. What it really represents is not a return of FHBs but the disappearance of other mortgage applicants, particularly property investors. Indeed in Spring Selling season it’s 5% lower than the previous month.
    2. LVR jumped up again so while the average loan size was higher, the average property value it was against was lower by around 0.5% so we should expect a decline in property values for October.

  7. Does the rise in FHB as a proportion mean that demand is returning, or does it just mean that investors are either a) maxed out on leverage or b) in too much pain to buy anymore?

    • It probably means investors are selling out to FHBs. Not that there are large numbers, but that the few transactions that are going on is heading that way.

      • I live in an area where at the height of the boom (2004) 50% of property was investor. I agree that the lower price rentals are being sold to FHB’s, the 300 to 400k properties, the more expensive 500k to 700k are being heavily discounted to attract buyers and not selling. Extra investor stock is coming on to the market, at around 430 to 500k and then being discounted by up to 10% once it has been on the market for about 6 months.

  8. Interesting that the AFG FHB numbers (total loans * FHB %) loosely track the ABS 5609 raw FHB numbers also. A similar spike in the ABS FHB numbers in Sep/Oct ’11 would be a positive for the various markets, but the FHB numbers are still very low with the FHOB hangover still in effect it seems.

  9. The AFG loan application volume data seems to be and logically it should be a leading indicator of credit volumes. Its a large enough representative sample of broker activity across Australia.

    However,as I’d like to see the whole report is there any reason why I can’t access it?

  10. The AFG numbers for the last quarter seem stronger than the same quarter last year. And that’s without the rate cut.

    I’d be worried the rate cut could set this whole bubble off again.

  11. I get roughly $440,000 average for mortgage refinance up by $60,000 yoy on ~300,000 loans ($18 Billion) roughly 1.5% of GDP and 3% of household savings.

    The LVRs no longer make much sense… My guestimate is about 300,000 additional titles are being used as third party security otherwise the Refi’s would be at 100% LVR on the ‘National’ dwelling price.