Mortgage approvals tumbled by its largest amount since January 2004, as Australia’s increasingly imbalanced housing sector threatens to unravel more quickly than most experts anticipate. With demand poised to moderate, are we on track for another housing downturn?
Housing turnover matters. With the exception of auction clearance rates -- and that is more a recent phenomenon in Sydney -- there is perhaps no other indicator that can provide as much insight into future price developments.
Mortgage approvals tend to overstate dwelling turnover for a variety of reasons including cancellations and potential buyers securing multiple approvals, but it’s nevertheless a more timely measure of turnover than those collected by private sector firms such as RP Data.
Price growth tends to be strongest when dwelling turnover is elevated. As turnover falls, price growth tends to ease and at a certain level often begins to fall. It’s a fairly simple dynamic and a useful rule-of-thumb for home owners and investors.
Loan approvals had, until recently, surged to its highest level in history. This was mainly due to investor activity, primarily in Sydney but also to a lesser extent in Melbourne. Elevated turnover led to rapid price growth, but there was always a risk that the market would quickly exhaust its available supply of people looking to buy.
The owner-occupier segment was always the most at risk in the near term. There is only so many people who are looking to trade-up or down at a particular time. Usually demand is replenished by first home buyers, but first home buyer activity remains exceptionally weak, although admittedly some first buyers have started to pick-up cheaper investment properties.
This has largely formed the basis of my near-term view on the Australian housing sector. The bull market has lasted longer than I expected -- I never anticipated that investor activity would surge so quickly into uncharted waters -- but the dynamics themselves always remained in play.
This brings us to this month’s housing finance data: perhaps the worst set of data the ABS has released since May’s disastrous capital expenditure figures.
It’s worth reminding readers that we are dealing with seasonally adjusted data. Volatility is quite normal and the result this month isn’t without precedent. Nevertheless, figures of this nature have traditionally occurred prior to or during a property downturn.
The number of loan approvals, excluding refinancing, fell by 8.2 per cent in May -- its largest monthly fall since January 2004 -- and is now 10 per cent lower over the year. With the average loan size continuing to rise, the total value of mortgages to owner-occupiers fell by a more moderate 6.1 per cent in the month.
The value of investor activity -- unfortunately the ABS does not collect transactional data for the investor segment -- fell by 3.2 per cent. This may reflect standard monthly volatility or it could indicate that banks are finally responding to APRA’s demand to reign in investor approvals.
Investor activity, as a share of total mortgage approvals, rose to 52 per cent in May. That rate differs significantly by state, with the share of activity closer to 60 per cent in New South Wales.
First home buyer activity, by comparison, remains subdued and accounted for around 11 per cent of new mortgages in May. It is worth noting, however, that there is a small but growing number of younger Australians who are choosing to buy their first property (often with their parents’ help) with the intention of renting it out rather than moving in.
What are investors buying? Around 93½ per cent of investor activity is directed towards existing property; new construction accounts for the remainder. As a result, investor activity creates few jobs and puts upward pressure on asset prices.
It’s one of the reasons why home ownership rates across most age groups, but particularly among younger Australians, have declined over recent decades. Investors seeking immediate capital returns are snapping up as much existing property as they can get their hands on, which has slowly transformed Australia from a country of homeowners to a country of landlords and renters.
It may take another couple of months to figure out whether this month’s data is a sign of impending weakness for property prices or a statistical quirk. Based on the historical data, drops of this magnitude are rarely an accident and typically result in much weaker prices.
According to RP Data, dwelling price growth remains strong in Sydney (up 16.2 per cent over the year to June) and Melbourne (up 10.2 per cent). But this merely exacerbates the risks associated with a sharp fall in mortgage activity.
The further removed the market is from its fundamentals, the more scope there is for costly falls. Investors have gone all in on Australian property on the proviso that they can make a killing via strong capital gains. If that isn’t possible then I expect greater supply to come on line as investors try to divest from an unprofitable position. This, combined with more moderate demand, will likely lead to Australia’s fourth housing downturn since 2004.