Mortgage growth diverges wildly from house prices

Friday’s mortgage credit data from the RBA revealed that the stock of mortgage debt outstanding grew by only 3.0% in the year to October 2019 – the lowest growth on record:

At the same time, yesterday’s dwelling value results for November, released by CoreLogic, continued to rebound, registering 0.4% annual growth:

Logically, the stock of mortgage credit should track dwelling value growth, since all buyers borrow to buy property. However, both series are now showing record divergence:

As noted previously, this disconnect is easily explained, since mortgage credit growth measures two separate things: 1) the addition to the mortgage stock from new mortgages taken out by borrowers (increases the stock of debt outstanding); and 2) the repayment of mortgage debt by existing borrowers (reduces mortgage debt).

Only the first point – new mortgages created – actually impacts house prices. The second – mortgage repayments by existing borrowers – does not reflect new housing demand and does not impact prices.

When interest rates are at record lows – as they are currently – we are likely to see mortgage repayments rise, which lowers mortgage credit growth, but doesn’t actually impact house prices.

Similarly, many investors have been forced to switch from interest-only mortgages to principal and interest, meaning they are now lowering the stock of mortgage debt outstanding (other things equal) without adding to housing demand.

Gareth Aird, senior economist at CBA, has made similar observations, noting that the rate of housing equity injection presently sits at a 30-year high, reflecting higher repayments:

For these reasons, MB prefers to look at the value of housing finance commitments (excluding refinancings), which only measures new mortgages and leaves out the noise generated by repayments:

As you can see, the correlation between housing finance and house prices has historically very strong, with housing finance typically leading prices.

However, because of the long lags in receiving housing finance data, we usually find out that the market has turned after CoreLogic’s daily index has already been reported.

Accordingly, we also look at auction clearance rates, since they provide a more timely indicator and also show a strong correlation with dwelling prices:

Leith van Onselen


  1. Hill Billy 55MEMBER

    The QLD figures of private treaty completions last week were 1047, which is the highest I’ve seen, probably over 12 months or so. However, local auction clearances have been turning south for several weeks so it’ll be interesting to see how the former stacks up over the next month as the FOMO brushes up against the reality that the economy is cactus.

  2. “since all buyers borrow to buy property” …

    well not all. Chinese and Hong Kong buyers into Sydney (via a local proxy to avoid FIRB and extra taxes) don’t.

    • And I suspect they partially explain why some areas have boomed again. Low rates, lower dollar = better entry price for Johnny Foreigner.

      • Spot on. This is what my planning son says. The Chinese are back (in Melbourne). We’re not in Kansas anymore.

      • Hong Kongers aren’t buying because of a lower dollar. They are buying because they are FLEEING the wreckage of Hong Kong.

    • The MIL and her best buddy bought an IP each in the same block in Crows Nest in the early eighties. Both died last year and the estates sold both flats last month. Both flats bought by Hong Kongers, with their own names and HK addresses on the contract, not via local proxies. They must be desperate to get the dosh out…

  3. The crash is still on, it’s just delayed by low volumes and skewed by high end properties selling and investor vendors pulling their properties off the market because they didn’t get what they wanted hoping for more.

  4. The something for nothing psychology is very powerful. The stronger the vibrance the more desperate to rob cheat game and ruin.

    When it’s too late strayns will become nasty

    • I cautiously raise my concerns about mega vibrancy quite frequently in polite company…. no one ever disagrees and they usually agree on the spot, they seem relieved to hear someone say it.

      • I think it’s becoming more acceptable as things get worse thanks in part to too much of a good thing.. over development busy roads, unaffordable housing etc..

    • Jumping jack flash

      Not necessarily a vibrancy mentality though.
      Get rich quick schemes, and the shysters peddling them have done quite nicely in Anglo world for at least a few centuries.

      The New Economy is simply a global get rich quick scheme run by the ultimate shysters – the banks. They’re doing quite well out of it too.

  5. The divergence is not a positive one. It’s a sell signal if you had to come down on one or other side. It says: only a portion of the market ‘believes’ in the next leg of the boom.

    When both are increasing in lock-step it says there is broader support. Obviously this can change but it does mean the banks will need to enter the sub-prime market again and employment will need to remain strong.

  6. Jumping jack flash

    The interest owing on all that debt must also be considered. From which national revenue-generating activity is it being taken?

    If we don’t produce enough new money, debt or otherwise, (ideally not debt of course but thats what we’ve been using for the past couple of decades) to cover the interest payable every day on the trillions of debt dollars attached to nonproductive houses then the economy will of course contract.

    House prices are simply the anchor that makes the debt viable in terms of the only measure of risk that matters in the New Economy, LVR. If these were also falling then It would be an epic disaster.

    But nonetheless it is great that debt growth is stagnating from a recovery point of view. Now we just need to get through the next 30 years until all the debt plus interest is repaid

  7. There is a strong correlation (almost identical) because they are essentially the same thing. It doesn’t tell you the cause.
    On one line your saying that houses are selling for a higher value and on the other line your saying that people are borrowing more money to buy house. Its the same thing. House price goes up, I need more money. House price goes down, I need less money. You will never see the inverse.
    Total housing loan approvals in $ value are back to 2013-14 levels. Now that is astonishing when you think how much house prices rose since then. That then makes you think about volumes. Looking at that data, the actual number of people taking out new loans are down so that makes sense.
    So how does billions of dollars less in new loans with a low number of new loans increase house prices?

    • When
      1) A lot of high end sales are to Hong Kongers who are not borrowing from Australian banks
      2) When volumes are low, AND
      3) when the size of everyones loan increases due to APRA, AND
      4) when the data saying the market is booming is probably fake/incomplete.