Housing finance gets down-traded

The vast disconnect between soaring house prices and tepid housing finance growth has been mystifying property analysts and economists alike.

Recent research into the type of households actively engaging in the market, however, may have finally provided one explanation.

While house prices have lifted 8.2% this year – their biggest increase since 2009 – housing finance has grown at only 5% (which includes figures out today from the Reserve Bank showing a 0.5% rise in October). This is unusual, because house prices and housing credit have historically moved in line with each other as people take out loans to finance their purchases. In fact, in some years credit growth has outstripped house price growth, as shown in the graph below.

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A major element in causing the disparity between the two is more “down-traders” entering the market, says Martin North from Digital Finance Analytics (DFA).

Down-traders are older people seeking to sell their large property and buy a smaller one. There are 1.3 million potential down-traders out of Australia’s total household number of 8.3 million, according to DFA’s research.

“From 2007 through to 2009, less than 15% of down-traders were thinking of acting in the property market in the next 12 months, North says, “But up to 45% now are thinking of acting or are actively in the market.”

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Chief economist at the Housing Industry Association, Harley Dale, and Angie Zigomanis, from industry researcher BIS Shrapnel, agree that down-traders help explain the riddle.

Dale says that while the imbalance might reflect the proportion of down-traders in the overall housing market, property transactions are still running below historically average levels. He thinks that would translate into roughly 200,000 property transaction on an annualised basis – which isn’t a huge number.

“But in the relative scheme of a softer market overall, it’s obviously a big explanatory variable,” he says.

Indeed, DFA research has found only 14% of the older generation seeking to downsize are considering using a mortgage broker, and just 16% of them need to borrow more. Most down-trades will occur for convenience, at 27%, followed by the desire to release capital for retirement, at 24%.

Dale and Zigomanis point to a number of other elements keeping credit growth subdued: the acceleration of mortgage repayments in a low-rate environment, many domestic and overseas property investors choosing not to borrow when they buy, and the absence of first-home buyers – the household segment that would boost credit growth.

But by seeking smaller homes, down-traders are pushing up demand in the hottest part of the market. A recent report by property research group RP Data found that in capital cities, two out of every three properties were sold for less than $600,000 in the 12 months to August.

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“There’s a lot of interest in that lower-market and middle-market area, and that’s one of the reasons why there’s a massive supply shortage and demand uptake,” North says. “The very top of the market isn’t moving up as much.”

First-home buyers are getting squeezed out of the market as the older generation pays over the top prices for these small townhouses. The proportion of home loans granted to first-home buyers has plummeted to a nine-year low (shown in the graph below).

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Given a huge proportion of home buyers don’t want or need a mortgage – like down-traders or wealthy overseas investors – any further cuts to interest rates by the Reserve Bank will have a minimal impact on credit growth, says North.