Trend growth in loan approvals -- for both owner-occupiers and investors -- is showing tentative signs of slowing. The trend may reflect noise, and we shouldn’t draw strong conclusions, but it is definitely worth keeping an eye on.
The value of loan approvals to owner-occupiers, excluding refinancing, rose by 1.8 per cent in January, to be 18.4 per cent higher over the year. Recent growth is being driven by higher loan sizes rather than increased activity: the number of approvals is unchanged on a trend basis over the past three months.
By comparison, the value of investor loan approvals fell by 3.3 per cent in January but is still tracking almost 30 per cent higher over the year. Low interest rates continue to support investor activity but there is tentative evidence that trend growth is beginning to slow -- by which I mean increasing at a slower pace.
Despite the obvious strength in investor activity, don’t discount the possibility that it could slow -- and rapidly. Low interest rates encourage investors to bring forward their activity but there is obviously a limit to the number of investors available at any point in time. Given the unprecedented rise in demand, the number of new domestic investors could quickly become exhausted.
It could be a similar situation to what happened with first home buyers when the first home owner bonus was unwound at the end of 2009. The number of first home buyers declined rapidly and has yet to really recover.
Obviously this would have significant implications for house prices, which have been largely driven by speculative investment activity over the past year, especially in Sydney and Melbourne where investors have been particularly active.
When investor demand is eventually exhausted, the bottom will fall out of the housing market, causing prices to decline. But for now it remains too soon to make any firm conclusions.
An important development in January was the sharp rise in the number of construction loan approvals, which rose to their highest level in four years. It indicates that that the sharp pick-up in building approvals may finally translate into actual activity soon.
Loan approvals to first home buyers increased by 1.5 per cent over the year to January, after falling throughout most of 2013. First home buyer activity remains incredibly weak by historical standards but may have already hit its trough and be on the mend.
But although first home buyer activity may not get any worse, I doubt we will see much momentum in the near-term. Renters are more concerned with job security than leveraging up during uncertain times. And who could blame them, with full-time employment declining over the past year?
At the state level, there is a variety of different trends. Activity remains strong for New South Wales but Victoria looks to be on the decline. Queensland is showing some strength, albeit of a low base, but Western Australian and South Australia are trending sideways. But it looks as though the momentum in lending activity is increasingly reliant on New South Wales.
The monthly loan approvals data can be volatile but there are a few distinct trends that merit closer inspection. Is the momentum in investor demand slowing? Is first home buyer activity set to improve? And is New South Wales the only state stopping a housing market slowdown? It is too soon to provide answers, but the coming months could have implications for all three questions and consequences for house prices and the Australian economy.