|Summary: The property market is rebounding, evidenced by the continued growth in house prices across most capital cities, and there is mounting evidence that real estate investors are driving the trend, helped by the low interest rate environment. Existing owner-occupiers are also in the mix, but first home buyers are noticeably absent.|
|Key take-out: Lending conditions are improving, with the number of owner-occupier housing loans rising 2.7% in June, ahead of consensus expectations of 2%. This was the sixth consecutive rise in housing loans.|
|Key beneficiaries: General investors: Category: Property.|
Buried within this week’s housing and interest rates coverage from the leading economists is some startling evidence that investors are not just rolling back into the housing market – but are actually driving the widely reported, if modest, lift in residential property prices in recent months.
As Alvin Pontoh of TD Securities reports below, the value of loans for investment purposes has lifted by a powerful 23.1% year-on-year: Moreover, Pontoh notes that while the market is at last lifting, talk of a ‘bubble’ is at the very least premature.
What’s more, Cameron Kusher of property researcher RP Data, suggests there are deeper structural trends afoot that will keep investors coming into a rising market at the expense of first home buyers.
As Kusher explains, there has been a substantial and enduring decline in the number of people in Australia that fully own their home: Fifteen years ago 41.3% of Australian homes were owned outright – today that number has dropped to only 30% being owned outright.
To look at it another way, that means for residential property investors there are more people to rent to: the percentage of the residential property market that were renters 15 years ago was 27.9% and today that figure has risen to 30.3%.
With a combination of lower interest rates ,rising prices and a wider rental market there are clear signs that Australian investors are streaming back into the property market despite its low yields and high asset values compared to overseas markets. (Managing Editor James Kirby)
Alvin Pontoh of TD Securities writes: The number of owner-occupier housing loans rose 2.7% in June, ahead of consensus expectations of 2%. This was the sixth consecutive rise in housing loans, bringing the year-on-year rate to a 3.5-year high of 12.7%.
This confirms that loan demand continues to pick up amid lower interest rates and recovering asset prices. This positive news has coincided with solid rises in house prices in Q2 ( 2.4% q/q according to the ABS measure) as well as the ongoing (albeit less rapid) improvement in building approvals. Much of the increase so far has been driven by established property ( 12.6% y/y); the gains in loans for construction – a leading indicator of building activity – are less strong ( 4.8% y/y), and has scope to improve further.
The value of loans for investment purposes rose 1.1% m/m and is up 23.1% y/y, underlining the positive sentiment towards the housing market. That said, it’s still way too early to talk about any impending ‘bubble’ – the RBA will view this data positively as further evidence that prior rate cuts are working.
In other details:
The take up of fixed rate loans fell from 19.1% to 17.8%, but remains historically high.
The proportion of first home buyers edged higher to 15.1% from 14.6%, but remains low.
RP Data’s Cameron Kusher writes: one of the most interesting pieces of data released in my opinion is the household tenure data. This data is split by four different types of tenure: owner without a mortgage, owner with a mortgage, renter and other. As you can see from the first chart, over recent years there has been a steady and consistent decline in households that occupy a home without a mortgage. Subsequently, there has been a lift in the proportion of households with a mortgage and those occupied by renters.
Over the period 2011-12, 36.6% of households had a mortgage compared to 30.9% that were owned outright and 30.3% that were rented. Fifteen years ago, 41.3% of households were owned outright compared to 28.3% which were owned with a mortgage and 27.9% which were rented.
The rising proportion of households that are owned with a mortgage is likely to be one of the factors acting as a handbrake on consumer spending. With the recent shift in consumer attitudes away from spending and more toward savings, the high proportion of the population with a mortgage is also likely to be having a dampening effect on retail trade and subsequently economic growth. No wonder we keep hearing that retailers are doing it so tough. In fact, retail trade figures released this week for the 2012-13 financial year showed that retail trade increased at is slowest pace over a financial year in 51 years.
When you consider that most rental accommodation in the country is owned by the private sector, the majority of those rental properties are owned by someone as opposed to a company or the government. The owners of these rental properties either have a mortgage or would own these properties outright. Again, the additional investment in housing by the private sector is probably hindering spending in other areas of the economy.
With an election now called, housing affordability should be an election issue, however it looks unlikely to be so. With low interest rates and the likelihood of further cuts, we are seeing housing transaction activity rise, and subsequently values are also now rising once more. The RBA governor, Glenn Stevens, has previously argued that he would like to see a pick-up in dwelling construction on the back of low interest rates rather than an increase in home values.
The response in dwelling construction has been moderate to-date with figures to June 2013 showing that there were 157,650 new homes approved for construction over the 2012/13 financial year. Although that may sound like a lot, it is 1.5% below the 20-year average. It must be noted that approvals over the year were 5.2% higher than over the 2011-12 financial year. As we know, over the 12 months to July 2013, capital city home values have increased by 4.9%.
With forecasts of lower economic growth and a higher unemployment rate, I would anticipate that the high proportion of residents with a mortgage will continue to spend in a restrained manner, particularly if they are concerned about their job security and have a sizeable level of debt.
The total value of finance commitments for investment purposes fell by 0.5% over the month, however investment loans have risen by 15.6% year-on-year, highlighting that this segment of the market is the primary driver of housing demand currently. In comparison, the total value of owner occupier refinance commitments has increased by 13.4% year-on-year and non-refinance commitments to owner occupiers are 13.5% higher.
First home buyers continue to play a minimal role in the overall housing market. In June, there were 7,331 first home buyer finance commitments, down 10% from May and 12.9% lower than in June 2012. As a proportion of all owner occupier finance commitments, first home buyers accounted for 15.1% of commitments in June. Across the individual states New South Wales (7.3% of owner occupier commitments), Queensland (11.6%) and Northern Territory (14.4%) are largely responsible for the slump in first home buyers. The significant fall appears to be a response to the fact that the first home owners grant is now only available on brand new homes in New South Wales and Queensland and Victoria has recently followed suit with changes in that state effective from July 1st.
These figures will be reflected in next month’s housing finance data release. Given this, I anticipate that first home buyer activity may slump even further over the coming months, despite the low mortgage rate environment which should be attracting a greater number of first time buyers.
The weighted average auction clearance rate over the past week was recorded at 69.3%, up from 65.3% the previous week. The major auction markets of Melbourne and Sydney continued to record a strong rate of successful auctions. Melbourne’s clearance rate over the last week was 70.9% across 600 auctions, up from 68.7% across 637 auctions the previous week. In Sydney, auction clearance rates were recorded at 75.5% last week across 466 auctions, up from 77.3% the previous week across 469 auctions. I am anticipating 1,273 capital city auctions over the current week.
Cameron Kusher is a researcher at RP Data. Alvin Pontoh is Asia-Pacific macro strategist at TD Securities.