Home loans lift but first home buyer share at record lows

Housing Finance; NAB Business Survey; Weekly Consumer Confidence

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  Home lending on the rise.

  The number of new owner-occupier housing loans (commitments) was up by 0.3 per cent in July but the value was unchanged. Excluding the refinancing of dwellings, the number of loans was down by 0.7 per cent. The value of all investment and owner-occupier loans rose by 2.7 per cent – the biggest rise in five months.

• The share of first-time buyers in the market fell from 13.2 per cent in June to a record low of 12.2 per cent in July. The value of refinanced existing home loans rose by 3.1 per cent to a record high in July – freeing up additional spending power for consumers.
• Fixed rate loans fell from 14.3 per cent to a 17-month low of 13.7 per cent of all loans in July. And the average home loan across Australia stood at $327,500 in July, up 9.0 per cent on a year ago – the fastest annual increase in four years.
• Business conditions and confidence: The NAB business confidence index fell from +9.6 points to +7.8 points in August. The business conditions index eased from a four –year high of +8.1 points to +3.5 points. The survey was conducted from August 25 to September 3.
• Consumer confidence lifts: The weekly ANZ/Roy Morgan consumer confidence rating rose by 0.6 per cent in the week to September 7. The confidence rating is down just 2.6 per cent on the 7-month highs recorded for the week to July 27.

What does it all mean?

• The housing sector has shown that it is the shining light of the Australian economy. And with interest rates low, population rising and housing affordability still attractive, housing is going to be the dominant sector driving growth over the next year. And importantly, home building will take the leadership role from mining as the nation’s key economic driver. The ongoing lift in housing approvals, rising new home sales, higher house prices will support confidence and provide policymakers with a degree of encouragement.
• But while investors are keen to pick up attractive income-producing assets, first home buyers are still reticent to wade in. Despite some of the most attractive buying conditions in years, the proportion of first home buyer loans is holding at the lowest level on record. There is anecdotal evidence that some first home buyers are being squeezed out by investors given tight housing supply. But the lower numbers of first home buyers also reflects the preference for young people to rent, rather than buy.
• While the rise in overall housing finance is positive, the key is the new home building market. Importantly, loans to build new homes have risen for ten out of the past 12 months and are up over 16 per cent on a year ago. An ongoing lift in construction finance would be beneficial for the broader economy given it is a key forward looking indicator. More homes being built over the medium term will provide additional support to overall economic growth while also increasing housing supply, and keeping a lid on aggressive house price growth.
• The business sector has certainly been more upbeat than consumers on the outlook for the Aussie economy. However it seems that a modest level of consolidation is now taking place. Business conditions have eased from four-year highs while confidence levels were tapered from 10-month highs. Overall the business environment remains relatively upbeat.
• Interestingly the business confidence readings have not been as volatile as those noted by consumers. If anything the business sector shrugged off the negative budget headlines and focussed on the big picture and it seems to be paying dividends. What is now required is a ongoing lift in business conditions – which would be good news for the job market. As profitability improves we would expect business to increase hours worked and hire additional labour.
• An improvement in labour market conditions would provide an additional boost to consumer confidence. The weekly Roy Morgan Consumer Confidence rating is down just 2.6 per cent on the 7-month highs recorded for the week to July 27. Consumers have become more optimistic on the prospects for household finances in recent weeks, with a particular lift in the survey on whether it was “a good time to buy major household item”.
• We would expect consumer confidence to lift further in coming months. As the strength in house prices and share markets come to the fore, more Aussies are likely to realise that the economy is in solid shape and interest rates are going nowhere. And more confident consumers should lead to better operating conditions for retailers.
• Overall, the Australian Reserve Bank is in a similar position to the US Federal Reserve. There is no pressing need at present to be tightening monetary policy. But the Australian economy is forming a solid base for future growth and therefore a base for more “normal” interest rates. However it is unlikely that interest rates will be lifted anytime this year.

What do the figures show?

National Australia Bank Business Survey:

• The NAB business confidence index fell from +9.6 points to +7.8 points in August. The business conditions index eased from a four –year high of +8.1 points to +3.5 points.
• The index of trading conditions weakened from +13.5 points to +6.6 points; employment weakened from 0 to -0.1 points; profitability weakened from +9.8 points to +3.3 points; forward orders weakened from +5.3 points to +0.7 points.
• Inflationary pressures were largely flat in August. The monthly reading of labour costs rose at a 0.7 per cent quarterly rate in August after a 0.9 per cent rise in July. Purchase costs rose at a 0.5 per cent quarterly rate in August, after a similar result in July. Final product prices rose by 0.2 per cent after a similar rise in July.Retail prices lifted 0.2 per cent in August, after a 0.8 per cent lift in July.
• Capacity utilisation eased from 81.0 to 80.7 in August, in line with the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit eased from around 65 per cent in July to around 43 per cent in August.

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating rose by 0.6 per cent in the week to September 7 after easing by 0.8 per cent in the previous week. The confidence rating is down just 2.6 per cent on the 7-month highs recorded for the week to July 27.
• Two of the five components of the index rose in the latest week:
• The estimate of family finances compared with a year ago was up from +4 to +7;
• The estimate of family finances over the next year was down from +19 to +18;
• Economic conditions over the next 12 months was down from -4 to -5;
• Economic conditions over the next 5 years was steady at +9;
• The measure on whether it was a good time to buy a major household item was up from +35 to +38.

Housing Finance:

• The number of new owner-occupier housing loans (commitments) was up by 0.3 per cent in July. Excluding the refinancing of dwellings, the number of loans was down by 0.7 per cent.
• The number of loans by owner-occupiers for the construction of homes fell by 1.3 per cent in July – only the second fall in 12 months. The value of construction loans fell by 2.7 per cent in July after a 1.7 per cent lift in June.
• The number of loans by owner-occupiers to buy newly-erected dwellings rose by 0.6 per cent in July and the value of loans fell by 0.3 per cent.
• The number of loans by owner-occupiers for the purchase of established dwellings (excluding refinancing) rose by 0.5 per cent in July but the value of loans fell by 1.1 per cent.
• The number of refinancing transactions by owner-occupiers rose by 2.4 per cent in July while the value of transactions rose by 3.1 per cent to record highs.
• The value of new housing commitments (owner occupier and investment) was up 2.7 per cent with owner-occupier loans unchanged while investment loans rose by 6.8 per cent.
• The value of loans by owner-occupiers and investors to build new homes rose from $2.27 billion to $2.42 billion in July, nearing the record high of $2.76 billion in February.
• The proportion of first-time buyers in the home loan market fell from 13.2 per cent in June to a record low of 12.2 per cent in July. First home buyer loans remain well below the long-term average of 20.0 per cent. Fixed rate loans fell from 14.3 per cent to a 17-month low of 13.7 per cent of all loans in July. And the average home loan across Australia stood at $327,500 in July, up 9.0 per cent on a year ago – the fastest annual increase in four years.
• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
• Business confidence and conditions are certainly a lot better than where they were a year ago. A further lift in profitability will be the key in ensuring that more workers are hired. Smart companies are looking for opportunities in the current environment but there are still plenty of risk-averse businesses on the sidelines. Exports and housing construction are the key drivers of the Australian economy.
• The Reserve Bank doesn’t need to be in a rush to lift interest rates. Inflation remains well contained, while the recent lift in the unemployment rate and underlying Aussie dollar strength continues to hamper rebalancing efforts across the economy.

What is the importance of the economic data?

• The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

What are the implications for interest rates and investors?

• Business confidence and conditions are certainly a lot better than where they were a year ago. A further lift in profitability will be the key in ensuring that more workers are hired. Smart companies are looking for opportunities in the current environment but there are still plenty of risk-averse businesses on the sidelines. Exports and housing construction are the key drivers of the Australian economy.
• The Reserve Bank doesn’t need to be in a rush to lift interest rates. Inflation remains well contained, while the recent lift in the unemployment rate and underlying Aussie dollar strength continues to hamper rebalancing efforts across the economy.