Mystery of rising house prices but flat credit

UBS does some great work with mortgage flow data today to uncover the mystery of why some house prices can rise so fast but credit growth remain weak:

With the housing boom now in full flight the questions keep being asked – Why hasn’t housing credit bounced? If it will, when and by how much? To answer these questions we have decomposed mortgage flows (new fundings, redraws, repayments, property sales & refinancings) for the recently completed 2H13. These flows provide an explanation for housing market share winners and losers, and enable much more accurate modelling of credit growth going forward.

New fundings grew 11% in 2H13. But the paydown rate continues to rise.
Across the Majors new fundings (drawn down) rose by 13% to $112bn in 2H13, second only to the 2H09 First Home Buyer’s boom. However, given seasoning of mortgage books and lower rates, the mortgage paydown/run-off rate rose by 1% to 17.2%. This left the Majors’ 2H13 mortgage credit growth subdued at 2.7% (seq).

new fundings

CBA & WBC see funding share recover. ANZ improving in proprietary
CBA & WBC have seen strong improvement in fundings, as may be expected given Sydney is at the centre of the housing boom. This has led to a stabilisation in market share. ANZ has seen an ongoing rise in proprietary sales, reducing its reliance on brokers. While NAB continues to grow fundings above its share of ‘back-book’, its share of new fundings has fallen as other banks have re-engaged.

All banks have seen run-off rates continue to rise. None have seen redraws rise.
The big housing boom will deliver a temporary bounce in credit growth Using this flow model, if: (1) Fundings grow 10% from 2H13 annualised levels (to 40% above the 2011 trough); (2) Run-off rates continue to tick up to 18% given seasoning of books and full period of lower rates; (3) Redraws rise a touch (no material home equity ‘ATM’ effect). Then: (a) Major Bank housing credit growth will reach ~6.5% in FY14E (system ~6.2%); (b) By FY15E even if fundings grow modestly, our models suggest housing credit growth will decelerate unless paydowns fall. ie The FY14E bounce in housing credit will only be temporary.


Regular readers will know that I’ve been on the lookout for signs that banks are being forced to look beyond deposits to fund accelerating mortgages. One of the reasons we haven’t seen it yet is that the paydown rate has also been growing, freeing up capacity for new lending. But I’m bit surprised at how slow it is relative to the past. A far high percentage of mortgage books were being paid down pre-GFC than post.

My guess is that the banks have not been forced to borrow more money to fund new mortgages is because credit growth has fallen even further than paydown rates so the ratio of fundings to paydowns is still lower than the past. I’ve charted the gap roughly speaking:



This does correspond with the chart of growth in wholesale funding for mortgages, which was slow in 2003-2005 but took off again from 2006-2009. Rough as guts analysis, but it suggests that once the gap reaches around 13%, wholesale dough is needed. Of course we have higher deposit growth now so that figure could be higher today.

UBS concludes:

Taking these factors into account, our fund flow models suggest housing credit growth is likely to accelerate to around 6.5% for the major banks over the next twelve months. Given the major banks are still winning some market share this would imply system housing credit growth of around 6.2%.

However, unless the housing boom continues at current rates through FY15E, it is likely that housing credit growth will peak around this time and again start to slow through FY15E to a still healthy 5.6%. By FY16E our models suggest that housing credit growth is likely to be back to levels in-line or below levels seen over the last twelve months

Therefore, we believe that the current period of very low interest rates is likely to provide a shot of adrenalin to housing credit growth. However, the law-of-large-numbers and a large pool of seasoning mortgages will likely ensure that it is only a short and relatively subdued housing credit growth cycle. The ongoing structural trend of slowing housing credit growth is unlikely to be broken. As a result, we believe business credit growth will need to carry the weight if system credit is to re-accelerate beyond 2014.

I suspect that there is not enough latent credit capacity to fund an expansion in both housing and business without expanding wholesale funding anyway.

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  1. “latent credit capacity to fund an expansion in both housing and business”

    The usual response to this conundrum is less business lending.Looks like there is quite a bit of steam left in this house price rise, at least until FY2016.

  2. My further suggestion re this “mystery”, is that a proportion of the credit expansion in the past was people taking out bigger mortgages against their rising house “value” just to spend money on consumption.

    Now a lot of this might be getting paid back. Perhaps people are finally losing confidence in the Great Aussie Magic Housing Ponzi?

  3. Turnover of property has slowed right down so the rising house prices are only having a modest influence on the pace of credit growth.
    Growth in mortgages at a system level over the past quarter is around 6.5% annualised.
    Don’t need a model filled with estimates, because there is no such disclosure on these inputs from the banks themselves on these factors, to arrive at this conclusion.

  4. Maybe I dont understand the problem but it seems to me that the need to raise additional external funds only arises when the “wealth effect” of higher housing prices translate into additional imports.

    If I sell you an existing house for $1M it does not matter that I only paid $10K for the house (originally) nor does the Aussie system need one additional cent because in effect the money for the borrower remains within the system (they borrow from the bank, I loan to the bank) net-net a zero value transaction.

    The only time we need new money (external mortgage funding)is when our new found housing wealth creates additional leakage through increased CAD. Of course in actual fact we borrow externally to actively suppress Aussie savings because that’s the best way we’ve found to grow GDP.

    • it seems to me that the need to raise additional external funds only arises when the “wealth effect” of higher housing prices translate into additional imports.

      Equity, mate. Use some of it to buy a jet ski. Or a bigger flat screen. Or both. Oh, and a trail bike. And a new SUV. All imports.

    • Bob You keep up with that stupidity you’ll be branded as someone who hasn’t a clue what they are talking about!
      The failure to grasp that simple reality is stunning.
      By the same token it must be recognised that what we have is a loop. If you create extra credit and lower interst rates with overseas borrowings that will result in more imports. If you have more imports you need to borrow more externally. Round and round.
      Modern economics seems to be governed by straight line thinking. It’s a big reason why modern economics is totally clueless about the problems we face.

      • Flawse mate, The difference is that I dont need to pretend I understand this econ BS, because its not my job. I dont lose a moments sleep, nor do I loose a single dollar because economics “experts” think I’m clueless. Sometimes I just wish that our economics professors enjoyed the same latitude and freedoms maybe then they’d stop parroting such mindless economics gibberish.

        Farmers are real people and that’s why the system is royally screwing them, they understand that it is only possible to produce so and so many bushels of wheat on an acre of farm land. They know exactly how much extra water it takes per Kilo of extra grain and they know the value of fertilizer. They also know the inherent limitations and long term dangers of over stressing their farmland, this all means that farmers make miserable economists and even worse bankers which is why personally I’m very happy to be lumped with the farmers and called clueless by my betters.

  5. UBS asks question “With the housing boom now in full flight the questions keep being asked – Why hasn’t housing credit bounced?”
    Possible answer:
    The market is distorted by foreign cash buyers who need little local credit.

  6. Chinese buyers are using cash to buy nearly every home at auction between Glen Waverley and Balwyn

    Mystery solved!!