Eliza Owen – CoreLogic’s head or residential research – has published an interesting report on the link between the ABS’ housing finance series and dwelling value growth. As expected, there is a strong correlation between the two, with finance typically leading dwelling values by three months:
This week the ABS released its housing finance data for December 2019. The results show a strong uplift in borrowing for the purchase of property over the month.
Total housing finance for the purchase of property increased 4.4% in December in seasonally adjusted terms, the highest monthly growth rate in over three years. It signifies an additional $832 million in borrowings for property in December.
Understanding the trends in finance data is important. By understanding the profile of borrowers and how much is being borrowed, we can more clearly understand the profile of buyers and how much they have to spend.
An increase in housing finance precedes an increase in housing values
This is supported by the strong correlation between growth in the value of housing finance, and growth in dwelling markets.
Annual growth rates in the value of housing finance nationally, excluding refinanced loans, have a 0.74 correlation coefficient with annual dwelling price growth across capital city markets. This coefficient is found from measuring data over a 16-year period, when accounting for a lag time of 3 months in dwelling price growth.
In other words, housing finance is a leading indicator of dwelling market performance by about 3 months. When there is an uplift in the value of new housing finance, there will likely be an increase in dwelling market values. This makes sense, because most home buyers will need some amount of credit in order to purchase a property; finance data provides one of the earliest indicators about changes in housing market activity.
The value of new housing finance commitments in December was 14% higher compared with the same time last year, but a comparison of the total value of housing finance throughout the 2019 calendar year compared with the 2018 calendar year (-11.6%) highlights this improvement is moving off a low base.
However, there was a strong recovery in housing finance from May 2019, which is reflected in the rapid price recovery in the national dwelling market.
Over the year, there were several events that increased demand for housing. Within the finance space, significant changes occurred that influenced the amount borrowed for housing:
- On January 1, the 30% limit on interest only lending was removed by APRA, although the removal of this policy seems to have had little effect on the number of interest only loans written;
- the cash rate was halved between June and October 2019, allowing cheaper mortgage rates and potentially higher borrowing capacity; and,
- in July, APRA changed serviceability assessment requirements, which removed the assessment criteria that a borrower must be able to make repayments of a floor of 7%, and replaced it with a 2.5% buffer on product rates. With typical new loan rates sitting well below 4% at December 2019, this means most borrowers would have increased loan capacity under the new assessment rules.
The strong December result points to a high value growth rate over Q1 for the combined capital city dwelling market values, however with housing affordability rapidly eroding as housing values outpace incomes, it’s unlikely such a rapid rate of growth in both housing finance and housing values can be sustained.
Below is a longer-term chart showing the strong correlation between housing finance and dwelling value growth:
While housing finance is indeed the leading indicator, and is a measure that MB watches very closely, it is reported two months in arrears by the ABS, thus reducing its predictive ability.
Accordingly, MB also watches auction clearances very closely. While not as pure a measure as housing finance, these are reported weekly and provide a more up-to-date gauge of the market’s strength:
Both are telling us that the housing market will continue growing at a solid clip over the short-term; although the recent manic pace of growth should slow.
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