CBA: Mortgage lending surge marks turning point

From CBA chief economist Gareth Aird:

  • The value of all housing‑related lending (excl. refinancing) rose by a large 5.1% in July.
  • The value of housing loans to owner‑occupiers (excl. refinancing) was up by 5.3% while the value of loans to investors (excl. refinancing) rose by 4.7%.
  • The lift in the flow of credit for housing is consistent with other leading indicators of dwelling prices, which have all firmed.
  • Lending to businesses was down in July, but has trended higher over the past year.

The value of all housing‑related lending spiked in July. We expected to see a big lift in total lending excluding refinancing (CBA (f) +5.5%), but the market consensus was centred on a more modest lift of 1% (value of loans to owner‑occupiers) and 1.5% (value of loans to investors).

RBA rate cuts coupled with regulatory changes and the reinstatement of the Coalition Government and therefore policy certainty around negative gearing and capital gains tax have clearly had an impact on the demand for credit. The flow of credit has a strong leading relationship with property prices. It’s no surprise that dwelling prices have lifted in line with firmer credit growth. Other indicators of the housing market, such as auction clearance rates and CBA’s HSI home buying measure, have also turned higher (see here).

The lift in housing lending was broad‑based between owner‑occupiers, investors and first home buyers. And solid rises were posted in all States.

There’s an old adage that one month’s numbers do not make a trend. But we think that the July figures mark a turning point in the housing‑related lending data. We expect lower mortgage rates to increase the demand for credit from here which will in turn support dwelling prices and turn a negative wealth effect into a positive one. Indeed that is the obvious channel how lowering interest rates stimulates lending and consumption.

RBA Governor Philip Lowe recently stated at the Jackson Hole Symposium that, “monetary policy cannot deliver medium‑term growth ..……. we risk just pushing up asset prices”. That’s exactly right. But right now it appears in Australia that the intention is indeed to give a short‑term positive boost to the economy from a pickup in house prices and credit growth from lowering borrowing costs. Clearly the linkages from mortgage rates to credit to house prices are working. But we are yet to see a lift in the consumer spending part of the equation. We expect to see that in coming months, aided also by tax rebates. In the longer term, however, the Australian economy still needs more productivity enhancing measures to boost growth. Personal income tax cuts would also help.

To the other detail, personal lending fell by 1.6% over the month but has stabilised in trend terms over the past four months. We may see a gradual lift over coming months due to a positive wealth effect. That said, consumer sentiment more generally is subdued which weighs on the overall appetite for non‑housing related debt.

Lending to businesses was down by 1.1% in July, but the monthly figures are incredibly choppy. On a rolling 12‑month basis lending has lifted over the past year, albeit modestly (see chart opposite).

Market implications: Financial markets largely looked through today’s data and there was little reaction. But to us the data is important. If housing‑related lending accelerates over coming months and dwelling prices rise too briskly the RBA may once again talk about financial stability risks. If we find ourselves in that situation the RBA may be more cautious about taking the cash rate lower without some form of additional macro‑prudential measurers. The irony, however, is that APRA has only recently loosened macro‑prudential measures on the serviceability assessments that ADIs perform on residential mortgage applications. The housing data related to lending and prices from here warrants close watching.

Comments

  1. The Traveling Wilbur

    If housing‑related lending accelerates over coming months and dwelling prices rise too briskly the RBA may once again talk about financial stability risks. If we find ourselves in that situation the RBA may be more cautious about taking the cash rate lower without some form of additional macro‑prudential measurers.

    WTF would they start to worry about that now? 🙅

  2. alwaysanonMEMBER

    I am about to capitulate after a over decade of renting and saving. Getting our unit inspected and being judged by a 22 year old agent for not cleaning the glass enough in the bathroom seriously is wearing thin. My wife and I are seriously looking at a solid and recently reno-ed 109 year old terrace in inner-west Sydney ~4km from CBD. I figure no strata and they don’t build them like that anymore. I shudder at the idea of paying the $1.6 – $1.7 million for it I think it’ll go for though – but we are in our late 30s so if we are going to do it we are running out of prime income-earning years to do it.

    https://www.realestate.com.au/property-house-nsw-forest+lodge-131846198

    We’ve saved a good deposit, don’t have kids and are earning ~$350k/year before tax (I took a new very well paid job in tech a couple years ago but I am not sure how many more years I’ll pull that kind of income) but will still need to borrow a million after stamp duty etc. We went to the open house on the weekend and there were ~40 groups there with all the usual suspects – gay couple with two incomes and no kids, boomer parents with their little princess they’ll be backing or buying for, lots of boomer investors, a couple young families. It was a bit stressful seeing all the interest.

    The auction is in two weeks and it’ll be our first time bidding on anything. Anybody want to talk me out of it? I really don’t want to be the greater fool but ~14 years of renting in Sydney has worn us down. I am worried about being swept up at an auction into overpaying though. I just know that me buying will be me ringing the bell at the top of the market/bubble and I’ll feel like an idiot…

    • Iron HorseMEMBER

      My tip if you are going to bid at auction – do not place your first bid until just before the hammer is about to fall and, if you have to/want to place any subsequent bids, stretch them out just before the hammer is about to fall also. This tends to take the steam out of the auction and gives the other party plenty of time to really think about whether they should be increasing their bid. Otherwise you can spend obscene amounts of money in literally seconds and then think wtf just happened there!!
      Also, if the property exceeds your budget and you haven’t submitted a bid the agent will not even know you were a serious contender.

        • H Scummo
          They just keep blowing the bubble, longer and longer but you can’t stop the outcome
          It’s coming and it’s going to be brutal, don’t buy for 5 years, it’ll be less than $800k

    • Imagine for a moment that you do buy this home. Now imagine that there is no crash and in 20 years time your home has quadrupled in value on further indebting of the population and massive increase in immigration. Sydney will have many ‘Have Nots’ at this point in time, do you think that Sydney would be a nice place to live still? There will be overcrowding, more crime, mass poverty, an every man for himself attitude with fighting over the few public resources that remain.

      Fcuk Sydney the place will be a disaster, my advice is earn the money while you can, invest elsewhere, then abandon the city and either leave for the country or another country. Let Sydney turn into the 3rd world and make sure you are not part of it.

    • I feel for your predicament. Once you hit your 40s banks will begin to look more carefully at your age and you may find it more difficult to get the 30year mortgages. If you can’t see yourself renting for life then just bite the bullet and go for it. When you look back in a few years from now the negative interest rates and QE will mean you are likely to be nominally ahead and have the security of your own place when you retire, which is a big factor when it comes to financial security in your retirement years.

  3. There’s a massive difference between existing, free-standing housing stock and apartments – off the plan and recently completed.
    The development industry insiders I speak to are warning there will be blood and entrails before Xmas.
    It’s really strange because on the surface everything appears to be fine but beneath the surface I’m told lies………..

    • Totally. We are about to enter a two-tier property market. Older inner-city/suburb free standing / semi / terrace in the “they’re not making any more of them” category spiking ever further skywards, and shoddily built over-supplied undifferentiated dog boxes in the “how low can they go” (particularly outer suburb and recent development explosion – eg Ryde) category, crashing to lows and triggering serious developer bankruptcy. Remember Ralan?

  4. Anyone notice that most of this jump is in the seasonally adjusted measure over the trend which is more lifeless. God knows how the seasonal adjustment is made and one month a trend does not make. Though I agree that there is a turning point though how big it is etc I am not so sure just yet

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