The mortgage market surged in June but failed to entirely offset last month’s massive decline in loan approvals. With demand set to moderate further, are we on track for yet another housing downturn?
There is a strong relationship between housing turnover and dwelling prices. Price growth tends to be strongest when dwelling turnover is elevated. As turnover falls, price growth tends to ease and at a certain level prices typically begin to fall. It’s a fairly simple dynamic but one that has provided important insight into the property market over the past decade.
Strong turnover has underpinned the surge in Sydney and Melbourne house prices over the past couple of years. But more recently, lending growth has moderated and points to a downward shift in momentum.
The owner-occupier segment was always the most at risk since there are only so many people who are looking to trade up or down at a particular point in time. Usually demand is replenished periodically by first home buyers but this segment of the market remains exceptionally weak by historical standards. It is worth remembering though that some first buyers have started to pick up investment properties in cheaper suburbs.
As a result, the property market has become increasingly reliant on investor activity to drive price growth. So far investors have been up to the task -- accounting for a record 53 per cent of new mortgage activity in June.
But there is a great deal of uncertainty surrounding investor demand. The major banks are raising the interest rate on investor loans, while the likes of AMP have stopped offering new mortgages for property investors.
Based on the dynamics at play, it appears possible that loan approvals will fall significantly over the next 12 months. Those who have purchased property recently -- particularly investors banking on sizable capital gains -- should be getting nervous.
The good news for investors is that the market recovered somewhat in June; the bad news is that it didn’t entirely offset last month’s massive decline. More importantly, trend estimates indicate that the market is either at or slightly past its peak.
On a trend basis, the value of new loan approvals to owner-occupiers, excluding refinancing, fell by 0.2 per cent in June and is now 3.7 per cent higher over the year. By comparison, investor activity continues to rise modestly on a monthly basis but is 22.5 per cent higher over the year.
It’s also worth noting that the number of loan approvals to owner-occupiers -- as opposed to its value -- is falling at a much faster rate. This implies that the property market has recently been propped up by bigger mortgages rather than stronger demand.
Returning to investor activity, we find that investors are mainly interested in existing property. Around 93.5 per cent of investor activity is directed towards that segment of the market. The remainder is accounted for via new construction.
As a result, investor activity creates relatively few jobs and mainly puts upward pressure on asset prices.
It’s one of the main reasons why home ownership rates across most age groups, but particularly among younger Australians, have declined over recent decades. Australia has gradually shifted from a country that placed great importance on home ownership to a country of landlords and renters.
The housing market is tentatively poised at the moment. Price growth remains strong in Sydney and Melbourne -- up 3.3 per cent and 4.9 per cent respectively in July according to RP Data -- but relatively weak in other capital cities.
Based on the latest approvals data, we can conclude that demand has begun to ease from a historically high level. This process is likely to be helped along by the decision from our major banks to raise interest rates of property investors.
Investors have gone all in on Australian property on the proviso that they can make a killing via strong capital gains. These investments were never about generating income -- the average rental yield is simply too low -- which suggests that some investors may look to sell when the market turns.
This combination of events -- combined with strong residential construction and a weaker terms-of-trade -- suggest that Australia is rapidly approaching its fourth housing downturn since 2004. Those investors who have recently entered the market should be feeling nervous and those sitting on the fence might be wise to wait.