Home Loans Hit Record Highs

Housing finance; NAB Business survey

Record home loans: The value of all home loans rose by 0.2 per cent to record highs in December.

The number of new owner-occupier housing loans fell by 1.9 per cent in December, just the second fall in the past the past 11 months.

First home buyers accounted for just 12.7 per cent of all loans in December, lifting from record lows.

Business conditions at 34-month high: The NAB business confidence index rose from +6.3 points to +7.8 points in January. The business conditions index improved from +3.4 points to a 34-month high of +4.4 points. The survey was conducted from January 28 to February 3.

The housing data has implications for banks, building and building material companies. The NAB business survey has implications for all businesses.

What does it all mean?

• There is yet more evidence that the housing market is taking over as the key economic driver of the economy. The value of home loans lifted to record highs in December as investors continued to shift their affections from bank deposits to property ownership. In addition the value of all Aussie homes lifted by 8.6 per cent in 2013 boosting wealth and supporting spending.
• The latest housing data showed a consolidation in housing loans in January. However the key is the new home building market and on that front the increase in construction loans is the jewel in the crown. Loans to build new homes have risen for 11 out of the past 13 months and are up almost 15 per cent on a year ago. An ongoing lift in construction finance is beneficial for the broader economy given that 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.
• And with interest rates low, population rising and housing affordability still attractive, housing is best placed to take over the leadership role from mining as the nation’s key economic driver. The ongoing lift in housing approvals, rising new home sales and higher house prices will support confidence and provide policymakers with a degree of encouragement.
• Businesses are certainly feeling a lot chipper about life. Not only are business confidence levels healthy but actual business conditions have gone from strength to strength and are now holding at the best levels in almost three years. It is clear that the healing process is underway and Aussie businesses are noticing much more favourable conditions.
• One of the key reasons that businesses are feeling more confident is that order books are starting to fill up. Forward orders lifted in January to the best levels in four years. And while profitability eased, it was from the fastest pace in 33 months. In addition the lift in retail prices suggests that retailers are finally able to pass on higher costs to consumers – a result that should improve margins in coming months. The Commonwealth Bank Business Sales Index confirmed similar trends in recent months with solid growth in broad-based economy wide spending. No doubt the low interest rate environment, increase in housing activity and lift in retail spending are all contributing to the improvement in business activity and overall profitability.
• The Reserve Bank would be encouraged by the way the economic recovery is panning out. The lower Australian dollar is helping with the structural rebalancing across the domestic economy, while consumers and businesses are starting to feel more confident to spend. Importantly, if the lift in business profitability and conditions is sustained in coming months, it should translate to a lift in employment. CommSec expects employment growth to lift towards mid-2014. Interest rates look likely to remain unchanged over the medium term.

What do the figures show?
Housing Finance:

• The number of new owner-occupier housing loans fell by 1.9 per cent in December, just the second fall in the past 11 months. Housing finance commitments are up 14.1 per cent on a year ago.
• Excluding the refinancing of dwellings, loans were down 1 per cent in January.
• The number of loans for the construction of homes rose by 0.4 per cent in December – the 11th rise in 13 months. The value of construction loans fell by 0.2 per cent in December.
• The number of loans to buy newly-erected dwellings fell by 1.9 per cent and the value of loans fell by 3.8 per cent.
• The number of loans for the purchase of established dwellings excluding refinancing fell by 1.2 per cent and the value of loans fell by 0.8 per cent in December.
• The number of refinancing transactions fell by 3.7 per cent while the value of transactions fell by 2.9 per cent.
• The value of new housing commitments (owner occupier and investment) rose by 0.2 per cent in December after a 2.2 per cent increase in November. Owner-occupier loans fell by 1.5 per cent while investment loans rose by 2.9 per cent.
• The proportion of first home buyers in the market rose from a record low 12.3 per cent to 12.7 per cent in December, but remains well below the long-term average of 20.0 per cent. Fixed rate loans fell from 17.4 per cent to 16.8 per cent of all loans in December. And the average home loan across Australia stood at $322,100 in December, up 4.5 per cent on a year ago.

National Australia Bank Business Survey:

• The NAB business confidence index rose from +6.3 points to +7.8 points in January. The business conditions index improved from +3.4 points to a 34-month high of +4.4 points.
• The index of trading conditions weakened from +11.7 points to +7.5 points; employment weakened from minus 4.1 points to +0.8 points; profitability weakened from +4.8 points to +3.3 points; and forward orders improved from minus 2.0 points to +5.7 points – a four year high.
• Inflationary pressures increased in January with labour and purchase costs rising at a faster pace than prices. The monthly reading of labour costs rose at a 1.2 per cent quarterly rate in January after a 0.6 per cent rise in December. And purchase costs rose at a 1.2 per cent quarterly rate in January, after a 0.8 per cent rise in December. Prices rose by 0.6 per cent after a 0.3 per cent rise in December. Retail prices rose at a 0.5 per cent quarterly rate in January, up from 0.2 per cent in December.
• Capacity utilisation lifted from 80.2 per cent in December to 80.6 per cent in January, but below the long-term average of 81.2 per cent.
• The proportion of firms reporting that they did not require credit fell from around 72 per cent in December to around 70 per cent in January.

ABS Residential Property Prices

• The average value (mean) of all residential homes rose by 8.6 per cent over 2013 to $539,400. While the number of homes rose by 1.5 per cent to 9.3 million.

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.
• 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?

• The latest business survey is certainly encouraging. Confidence and conditions are both lifting, while the order book and profitability looks a lot healthier than a few months ago. If the improvements are sustained it should translate through to healthy growth in employment over the medium term.
• Investors remain keen about putting their money to work in the housing market. Certainly there are plenty of grounds for optimism with rising population, low interest rates, government grants for new construction and tight housing markets.
• The good news is that investors aren’t just buying established dwellings and driving up home prices, but money is being ploughed into new house and apartment developments and adding to housing supply and economic activity more generally. It is clear that home construction will play a key role in driving the broader economy in 2014, taking over from the mining sector. And arguably more industries and regions will feel the benefit of increased home building rather than mining construction.
• 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 has lifted from 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.

Source - Craig James, Chief Economist, CommSec