Concerns for Recovery Grow as Loans Drop and First Home Buyers Exit

Demand for new home loans fell for the first time this year
Photo: Richard Taylor

Demand for new home loans fell for the first time this year, heightening concerns about the sustainability of the fragile and multi-paced housing recovery. 

The ABS housing and finance data shows a drop in both the value and number of housing commitments for August. 

Seasonally adjusted figures indicate that compared with July, overall mortgages fell by 3.9 per cent for owner-occupied housing, with home lending for established dwellings falling by 4.6 per cent and new dwellings falling by 4 per cent.

Somewhat worryingly, the proportion of new home lending to first home buyers has dropped a further 1 per cent to 13.7 per cent, suggesting that rising prices combined with low housing supply are working together to drive out first time buyers.

An Investor Led Recovery

Credit growth in a housing market is seen as a signal that activities are coming from owner-occupiers, as investors tend to be already cashed up with a lesser need for borrowing. 

In recent interviews aired in a segment from ABC’s TV program The Business, experts Martin Smith and Louis Christopher discussed the evidence and concerns relating to the lack of new home lending in the current housing boom.

According to Martin Smith, former director of Fujitsu, banks are seeing credit growth of around 4-5 per cent p.a., nowhere near the 16-18 per cent growth in loans experienced in the early 2000s.

“New home lending to first home buyers has dropped… suggesting that rising prices combined with low housing supply are working together to drive out first time buyers.”

This suggests the housing recovery has been driven by investors, unlike previous housing market booms in the 80s and 90s which were owner-occupier driven. 

The consequence of this dynamic is significant, as summed up by Louis Christopher, the managing director of SQM Research:

“It may make the market more speculative,” Mr Christopher said.

“Investors will sell off rather quickly if they think the market will head south or fall in some way, or if there is an increase in interest rate,” he added.

Clearly, owner-occupiers cannot react to housing market fluctuations so quickly hence they are seen as a stabilising force. 

However, with median house prices rising rapidly in the Sydney and Melbourne markets, owner-occupiers or first time buyers are finding it hard to compete against investors in an environment with low housing supply.

Stimulating Credit Growth

According to HIA senior economist Shane Garrett, a further rate cut from RBA before the end of 2013 was important in order to ensure the housing recovery fired on all cylinders.

An even lower interest rate could entice first time buyers back into the market, hence improving demand for new home loans.  

This might provide a short-term solution, though the medium and long-term answers will also need to address housing supply issues, modest levels of income growth, rising unemployment and the prediction of a weakening economy.

Whilst there is a sound basis for the concerns around an investor led housing recovery, the drop in new home lending may not be a continuing trend, especially as election uncertainty could have contributed to a sudden fall in demand for mortgages.

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