Australia | Jul 09 2008
By Greg Peel
The Australian housing finance numbers released today for May were much weaker than expected, and follow the release of the July consumer confidence measure earlier today which was the weakest for 16 years.
The number of loans made to owner-occupiers in May was down 7.9% – the fourth consecutive month of contraction for a per annum fall of 21.5%. The total value of loans fell 6.9%, or 19.5% per annum. This is the lowest level in four years.
While the magnitude may have been a surprise, the direction certainly wasn’t. A total 1.0% rise in the RBA cash rate and an average 1.4% rise in bank standard variable loan rates since August are easy-to-spot reasons, along with the old soaring fuel prices and general doom and gloom evident in the consumer confidence numbers. Either prospective home-owners have given up on the idea based on simple expense, or they are waiting for interest rates to come down again before making a move. Notably the proportion of fixed interest rates fell sharply to 13% of all loans.
The impact of higher rates is most apparent in the existing house market, notes Westpac senior economist Andrew Hanlon, while lending for the construction of new dwellings is proving somewhat more resilient, albeit volatile. This segment fell only 5.0%. Nevertheless, the fall belies the fact that there is an underlying new dwelling demand of about 185,000 per annum at present, according to CBA senior economist John Peters. The average is about 155,000.
The response from builders has been “tepid”, Peters suggests. This is often put down to the sharply rising cost of construction materials which, one presumes, a builder takes some level of risk on, but I suggest there have been plenty of Aussie builders probably sitting at home and watching stock footage of vacant new US dwellings being shown over and over on the news with the accompanying sombre assessment of the dire state of that particular market and the bargain prices being offered in sheer desperation by stranded building companies .
And then there’s the simple shortage of labour, and the higher wages no doubt required to secure what labour there is. It can’t be that builders are simply sitting on their hands, it’s just there’s no great rush to become overextended. And the housing finance numbers show that while there might be a need for 185,000 new dwellings, no one much is sticking up their hands to buy something at these rates.
Which means the rental market will no doubt come under further pressure, with vacancies falling and rent levels rising. It is anecdotally known that you could advertise your backyard dunny and 200 people will turn up to fill out an application at the moment, but I still cannot subscribe to theories suggesting rents will rise by as much as 50%. Who has the money to pay? No one seems to have the money to get a loan.
What this all should really mean is that house prices will have to fall to meet both the level of demand and the funding capacity of that demand. Last time I looked the great influx of immigrants to this country were not all investment bankers. Not that investment bankers can afford houses anymore. I thought we were bringing in skilled tradespeople. They might be able to attract a decent wage but they are only in the same financial boat as everyone else. And they no doubt have families to feed and cars to fill as well.
And then there’s the growing demand from the naturally growing population from within. Has no one noticed that kids aren’t leaving home until they’re 42 now? And that the old share-house is back in vogue?
Has no one noticed either that people are also leaving the big cities such as Sydney in droves to find a better life in cheaper accommodation elsewhere? Until the house prices in every city and regional centre reach some sort of equilibrium then it’s hard to see house prices rising much anytime soon. They cannot rise forever, and in just about every other OECD country they are in the rather rapid process of collapsing. And let’s not forget that Australians have quadrupled their household debt levels in the last decade or so.
The RBA is oh so very wrong in assuming the impact of higher mortgage costs and a rise in foreclosures will only really be evident in the traditional “mortgage belts” (read Bogan-villes) of Sydney and Melbourne. Take Sydney’s Hills District for example. Aspiring home-owners purchased McMansions mortgaged for $1m based on the mortgage broker’s valuation that were really only worth about $800k at the time, and are now worth $700k and falling. And there is no public transport at time when fuel costs are having an enormous impact. Are these ghost towns going to be snapped up by eager skilled immigrants?
Anyway, it has been the RBA’s intention to slow demand in the economy and one would have to suggest it’s done a pretty good job, as far as the evidence suggests. The implication is thus that the next move in interest rates should be down, although not in any great hurry. Inflation needs to settle first, so we need that oil price to keep falling. When rates finally do come down then we might see a return to demand for housing finance.
That is, of course, if we haven’t all blown our tax cuts on discretionary items in the meantime. Last week’s way-more-than-expected jump in May retail sales sits as a paradox among all the other data released recently, and a cause for alarm for those economists honestly believing we could never see another rate hike.
Perhaps a new and bigger tele is a substitute for a new and bigger house?