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February 29, 2016

Home loan affordability on the mend

A rise in the proportion of first-time homebuyers in the market in December as well as a jump in home loans being taken out by owner-occupiers could indicate housing is becoming more affordable this year, given softer conditions in property markets and ongoing low interest rates – with the Reserve Bank recently welcoming slowing growth in house prices in the nation’s biggest cities, Sydney and Melbourne.

Reserve Bank of Australia (RBA) governor Glenn Stevens recently declared that the nation’s hottest housing markets, Sydney and Melbourne, are taking “a breather” after a strong run in prices in recent years.

“Obviously we don’t want a crash, but I think the pace of growth that we did have, you’d have to really worry if that continued on and on,” Stevens reportedly told the House of Representatives economics committee in early February.

Auction clearance rates nationwide are now below 70 per cent after almost hitting 80 per cent last year and they look like they could be headed lower given a downward monthly trend since mid-2015.

According to data from SQM Research, asking prices for houses – a leading indicator of future house prices – are falling in Perth and Darwin, with unit asking prices also falling in Canberra and Adelaide.

In addition, according to the RBA, there’s also been an increasing number of apartment projects put on hold, particularly in areas where there were concerns about potential oversupply.

“Housing credit growth overall had stabilised at around 7½ per cent, following a period of rising growth since late 2012. Growth in credit to investors in housing had declined, offset by an increase in growth in credit to owner-occupiers,” the Reserve Bank said in its February board minutes.

Indeed, regulatory measures are working to emphasise prudent lending standards and are containing risks in the housing market – in other words, investors aren’t borrowing as much as they were one year ago.

That’s leaving the door open for more owner-occupiers to enter the property market, as noted by the RBA.

Reflecting greater home loan affordability for owner-occupiers, the average loan size for first homebuyers dropped $6,400 to $348,100 between November and December 2015, while the average loan size for all owner-occupied housing commitments fell $8,500 to $377,600. Banks are still doing good business as the number of home loans grows, but the average size of those loans has fallen, arguably reflecting greater affordability for property.

The overall number of home loans taken by owner-occupiers in December jumped 2.6 per cent to 58,552 while the number of first homebuyer commitments as a percentage of total owner-occupied housing finance commitments rose to 15.1 per cent in December 2015, off an 11-year low of 14.9 per cent in November 2015.

So, owner-occupiers are accounting for greater activity in the property market while borrowing less to buy houses.

This trend will likely continue through 2016, as investor demand for housing continues to grow at a more modest pace then it has in recent years given higher rates on some investment home loans.

Another important point is that the unemployment rate in Australia is falling – down to 5.8 per cent in December and down from as high as this 6.3 per cent in July last year. This will help many young people buy their own home as they’ll have more money in their pockets and job security.

The housing data reveals the nation’s long-standing love affair with property, reflected in the staggering size of Australia’s home loan industry. In December 2015, the value of outstanding home loans funded by banks and other authorised deposit-taking institutions totalled a record $1.46 trillion, made up of $931 billion in home loans to owner-occupiers and another $528 billion to investors.

Fixed-rate loans, as a proportion of all new home loans, leaped to 13.0 per cent in December from 11.4 per cent in November, as borrowers took advantage of low fixed rates, which have in some cases fallen below variable home loan rates.

The recent share market volatility is likely to keep downward pressure on market interest rates, which will lead to an ongoing favourable interest rate environment in 2016, in terms of historically low variable interest rate as well as low fixed rates on home loans.

About Amanda Watt

Amanda Watt is the head of act. community partnership banking.