AFG indicating modest price growth for housing

Please find below Nathan Webb’s analysis of the latest AFG housing finance data.

I’ve had a bit of a hiatus from charting, while helping my wife to look after the newest addition to our family.  So I’ll have to keep it brief, lest I’m needed to do some cuddling.

The AFG mortgage volumes for September and October have continued to impress, building up a small head of steam.  The following charts begin by making an adjustment for the number of trading days in each month, and using the difference above or below average to predict changes in house prices.  That is, when mortgage sales in any given month, adjusted for the number of trading days in that month, are above average, then you can expect prices to rise.

The first chart shows the overall view, with the bars showing the actual volumes, and the red line indicating where they should have been after adjustments.  The last 12 months have been pretty much on the mark.  But it’s hard to see in this chart, so the next chart plots the difference between the two lines, referred to as the “residuals”.

This chart shows that the mortgage sales are clearly in the positive, although still only modestly so.

The residuals are then compared to SQM’s stock on market report, where there is a very strong negative correlation.  The third chart shows this, with the residual inverted and laid over the top of the change in Stock on Market.  I’ve used the 3 month moving average to smooth things out.  The AFG results lead the 3mma by 1 month.  The chart is showing that after a period of stability, expect some small falls in the stock on market over the next couple of months.

The correlation with RP Data’s house price index is also pretty good, apart from the recent volatility.  This pattern of extreme volatility should be expected to continue, thanks to the new daily series.  The overall trend points to very modest growth, in the vicinity of 2-3% per annum, for the rest of the year, before slightly accelerating into 2013.

Finally, with the ABS quarterly series having been released at the end of October, it is timely to update the chart comparing the residuals to that series.  Again, further modest growth is to be expected, with upwards revisions in the most recent values.

All up, this has been a good couple of months for AFG, and this should flow through to other indicators over the next few months.  The two trailing indicators of prices from RPData and the ABS will continue to provide positive news (for those in the market) for the next 6 months.

Leith van Onselen
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  1. Modest house price growth?..I’ll show you modest! “…average house prices have risen nationally by 1.3% over the last 4 years” says NZ Finance Minister Bill English. For us that’s a nominal rise of …$5,000…$1,000 per flat annum… Now that’s modest.

  2. Or, could that be that dropping interest rates is expanding the property bubble. It’s hard to think that this is a true increase of property value when the government for no reason at all starts dropping interest rates to keep the bubble going.

    I was thinking that without all these devices been used, and the release from the Foreign Investment Review Board of the true number of investments including all the illegal ones the property market would most likely already be some %20 or more below these highs.

    The market seems to be based on pure fraud from government and speculation.

  3. Nathan, any idea why AFG figures – last I looked which was quite a while ago, the longer term ones seem to have been pulled from the net – have only ever show steady price rises, never falls even in the face of falling prices on the national level?

    We know prices fell by significant amounts in many places, why does AFG not capture this?

    • They don’t show prices Left-ee only loan amounts. Any change in loan amounts might just reflect the borrower demographic and not prices.
      Over time the loan amount would trend upward.

      • Thanks Peter, loan sizes was what I meant to say, not prices.

        You and I discussed this some time ago and you weren’t sure of the reason at the time.

        • I’m not sure either, but I guess mortgage brokers are good salesmen 😉 they’ll never let the loan sizes fall.

          The average price can be calculated from the LVR and the loan size, and that has been roughly tracking house prices.

          But you’re right that the loan size trend is forever upwards, although the growth rate looks to have slowed (slightly) recently.

          So putting those two together means that the LVR has soared when prices have fallen, and dropped as they’ve risen.

          Another thought (besides brokers being good at sales) is that interest rates have driven the changes in LVRs, so it’s a coincidence that loan sizes are growing steadily? So prices have fallen, interest rates are cut, and punters jump in with high LVR loans to take advantage of that.

          • Thanks Nathan.

            I never really doubted the accuracy of the AFG figures but have nonetheless been a bit puzzled as to how it’s members have only ever made steadily larger loans (trend-wise) irrespective of the direction of house prices.

            Although AFG did have that little data hiccup last year, wasn’t it?

          • Hi Patrician – just to clarify, Lef-tee and I are referring to dollar amounts, so Loan Sizes (total amount in dollars of loans), and average LVR, and the calculation based on that of average price of property. Nothing to do with the volume of loans issued.

            As the charts show, growth in the number of loans (volumes) definitely does indicate increasing prices.