Australia | Aug 09 2007
By Greg Peel
It was one of those fall-off-the-chair numbers that came out yesterday. Total housing lending (which includes investors and intended owner-occupiers but not refinancers) jumped a whopping 10.8% in June, following 3-4% increases in the previous two months. That’s the biggest monthly increase since mid-boom January 2002, and suggests the pace of housing lending growth has reached 50% in 2007.
Breaking it down, owner-occupier lending rose by 8.4% (up from 1.0% in May) while investor lending rose 14.8% (9.8%) showing strength in both lending for new investment dwellings (up by 10.3%) and existing (15.2%). House prices rose by 3.2% (or 4.0% if you take out a weak Perth) in the second quarter which is the biggest jump since 2003.
Anyone would think the housing boom was back.
But looking further into the detail, some truth emerges. While the value of owner-occupier housing loans jumped up in June by 8.4%, the actual numbers of housing loans issued grew by only 1.1%. In other words, there aren’t that many more people in the market for a mortgage. They’re simply just prepared to gear up a lot more. This is the conclusion of UBS economists.
What the numbers don’t tell us is just who it is doing the borrowing. Overpaid executives perhaps? Cashed up stock market winners? Or just middle income earners pushing their gearing ratios further?
It does not appear to be first home buyers, as their proportion remains relatively low given the affordability issue. Nevertheless, that isn’t to say FHBs aren’t still pushing the envelope. Their proportion is lower, but their numbers are still steady. Westpac economists have analysed FHB numbers and come to the conclusion that although hand-outs like the FHB grant and stamp duty assistance make a bit of difference, “recent first home buyers are also making significant financial compromises in order to enter the housing market”.
So there seems to be an all around borrowing frenzy.
These are June numbers. In July, we hit the global credit crunch. While Australia does not issue mortgages that can be considered truly “subprime”, there has been a growing popularity for lo-docs, no-docs and high loan to value (little or no deposit) loans. Or at least there was.
Some interesting numbers came out in the US last night. They showed that mortgage applications actually increased last week despite the global carnage going on. You would be forgiven for expecting quite the opposite. Does this mean it’s damned the torpedoes and full steam ahead? No. One commentator responded to bullish sentiment by pointing out that an increase of loan applications is a reflection of the fact home loan aspirants are finding it a lot harder now to find a willing mortgage lender. Hence they are filling out multiple applications.
JP Morgan noted yesterday that debt spreads for non-bank financials (such as mortgage lenders) have now blown out. JP Morgan suggested “this is a major issue for the Australian banks from a global perspective as the strong home mortgage loan portfolio growth of the recent year has far outstripped retail deposit growth with Loan to Deposit ratios well over 100% and the deficit financed by international capital markets”. The deficit will now need to be financed at a higher spread which is “bad for Australian banks generally”.
And it will be bad for mortgage lenders trying to do business and bad for home buyers trying to get a mortgage. The lazy, hazy, crazy days are now gone, at least for the foreseeable future. There is already an expectation that the strong housing lending figure in June will correct somewhat in July, given the last minute superannuation movements. But the figure will also soon be impacted by reduced mortgage and investment loan availability. Next it will be interesting to see where prices go.
And the impact is not just in housing. JP Morgan also noted this morning that US prime corporate lending spreads have pushed up from 86bps (over Treasuries) at the beginning of June to 125bps now. This is quite a significant shift for non-junk paper. However, it is not a historically high figure. Spreads peaked recently at the end of 2003 at about 250bps before falling as low as about 50bps before the Fed began its tightening phase.
Nevertheless, the shift hasn’t come at the best time for Australian corporates. From 2001 to June 2004, the gearing ratios of ASX 200 companies fell from 63% to a multi-year low of 41%. At the time, companies were being criticised for being under-geared. However, through a combination of extensive share buybacks, higher dividend payout ratios and increased capital expenditure, that ratio has now snuck back up to 54% as at June.
The move in US spreads will inevitably flow through to Australian lending rates. Says JP Morgan:
“The combination of higher gearing, higher interest rates and wider spreads means some companies may see a blow-out in interest expense in future forecast years, depending on the term structure of borrowings. On its own this may not be a problem, but is an added factor to watch in the mix of risks facing corporate earnings.”
This is the first sign of doubt creeping in from analysts that FY08 forward price/earnings ratios, which have been deemed to be historically cheap, may need adjustment.
Once again, a closer inspection and a bit of deeper analysis renders Australia’s “immunity” to US subprime mortgages as a somewhat specious argument.