Credit Cycle – Growth is Up and Running

Will history repeat?

Last year I posed the question: “will history repeat itself with regards to the Australian credit cycle?”

In previous cycles, the market has responded and property prices have lifted again without a crash in a long period of time now.

There has been plenty of talk of a housing crash but actually what we got were fairly moderate falls through 2011 and the first half of 2012, before prices began to bounce back.

And now it appears that the market is set for a period of growth as interest rates have been slashed in anticipation of the end of the mining construction boom.

For two consecutive months, the housing finance growth reported by the ABS has outpaced expectations. Last week Veda Advantage reported its strongest credit demand in years, and the ABS reported a very strong upward trend in housing finance over the past year.

Banks competing for market share

Added to the above it appears that the major lenders are now hotting up competition for business.

Not only did the major banks pass on the full interest rate cut this month of 25bps, ANZ actually went beyond this and delivered 27bps to cut its standard variable rate to just 6.23% and some smaller players also went for a greater cut than 0.25%.

Going forward, ANZ has pledged to move its lending rates independently of the Reserve Bank, and indeed it already has hiked its rates ‘out of cycle’ twice, by 6 basis points each time.

That banks are now passing on full rate cuts and sometimes more at this point in the cycle is an indication that lenders are beginning to compete for market share, and some fixed rate mortgages are now available at very cheap levels indeed – well under 5.00% per annum.

First homebuyers

The last piece in the puzzle for this cycle is whether first homebuyers have come to the party or will soon do so.

For some months there has been an argument that it can’t be called a property market recovery unless first homebuyers are participating.

I understand the logic but first homebuyers are rarely leaders in the market, and besides, last week’s finance figures from the ABS showed a very strong 21.1% increase in lending for new dwellings which may indicate activity in that sector.

Figures from the Housing Industry Association have shown that first homebuyers are creeping back into the market so last week’s figures may represent further evidence of that.

Where will outperform?

To date at least, a lot of the action in the property market seems to have been from investors, particularly in states such as New South Wales and Western Australia, although there have been promising signs in some other states.

I tend to lean towards prime location apartments in the capital cities.

Investors often go for this kind of housing stock and it is probable that these market sectors will see uplift as 2013 progresses.

It’s been said for the last couple of years that what the property markets have really lacked has been a shot of confidence.

It’s amazing how buyers are happy to sit it out, but when prices start to rise they tend to lurch into the market for fear of missing out.

With the cash rate at a record low of just 2.75%, but Australia (at this stage at any rate) having maintained GDP growth and low unemployment, a property price boost looks to be the most likely outcome.

With auction clearance rates hotting up nationwide, notably in Sydney and Melbourne, it looks likely that this year will be a good one for Australian property.

There will be challenges ahead as the mining boom fades. The big question for Australia is whether it can successfully rotate away from mining construction with other sectors of the economy stepping up.

Last week’s figures were a step in the right direction. What Australia doesn’t want to see is its unemployment rate revert upwards.