Still the RBA has gone to great lengths to express their concern about an Australian economy that is, in their view, operating close to its limits. From Glenn Stevens latest speech (here):

As of today, measures of capacity utilisation are not as high as at the end of 2007, and unemployment is not as low as it was then. Nonetheless, the degree of slack in the economy overall does not seem large in comparison with the apparent size of the expansion in resources sector income and investment now under way.

Most particularly, Glenn Stevens is concerned about incipient wage inflation from a tight labour market:

Re-reading his prepared thoughts, the mining boom casts a long shadow over is thinking.

In short, Stevens infers that the future of Australia is in selling our resources to Asia – he expects resource exports to increase as a percentage of GDP (though he is silent on whether this is via a contraction in real GDP). Secondly, he argues that the multiplier from resource exports is much larger than the bold numbers would suggest. While ‘less than 2%’ of the workforce is employed directly in the resources industry, there are a plethora of suppliers to the sector, we are all investors via our superannuation, and if all that fails there is always what we take in taxes. The trickle down effect to the rest of us is commensurately large.

Even if Stevens concedes that some sectors are doing it tough, it just doesn’t come across as a compelling view for the future of the Australian economy. He suggests that the higher currency is an unavoidable consequence of Asian demand for commodities and the ‘structural’ shift to being a resource exporter at the expense of all other industries is similarly a by-product of being the lucky country.

I don’t get it. It is too simplistic – and bordering on lazy with respect to how Australia could employ its resources to prepare for its future.

But equally, it is an argument that undervalues the sheer weight of money that has been borrowed and then invested in the residential housing sector. This debt burden is real and it is large by global standards.

So if you are of the camp that accepts that house prices, and by extension construction, have been elevated by an expansion of credit – and that this expansion has passed its apex – then anything that weighs on the correspondingly large mortgage pool is simply going to exacerbate an already difficult situation.

While Glenn Stevens is undoubtedly right about the forthcoming bonanza in mining investment, please consider how important housing finance is to the Australian landscape and ask whether this capital boom is really going to save those over-leveraged first home buyers that are a little further from the champagne trickle.

First to the good news – the absolute number of home loans was up in March, though it’ll take more than one month of buying to turn the now well established downtrend in volume.

Putting the change in loan size with recent house price data, it looks like the uptick in the number of loans is a response to lower prices. Note the change in average loan size for first home buyers has been falling since late 2010.

To put this in a wider context, the following chart illustrates just how rare this type of decline has been over the last 35 years. What we are seeing here is the breaking of the leveraged consumption trend that has been with most of us throughout our working lives. If it continues, as I suspect it will, then the ramifications for the Australian economy will be significant indeed.

The changing of the guard is being replicated in various measures of activity in the Australian economy.  With a shorter-period data set, it’s harder to make too much of New Motor Vehicle Sales.  Still looks suspiciously like we are yet to see the low in this most recent rollover in sales volumes…

The floods across the East coast are being pointed at as culprit – perhaps there will be a bounce-back once the rebuilding commences (to the extent there is rebuilding as opposed to a good hard scrub). Still, another interpretation could be that the more recent softness is just a continuation of the downtrend that has been underway for some time.

Certainly, if you place this data against the most recent building approvals (ABS release here), the argument that housing construction has passed a cyclical peak looks to carry some weight.

With the average size of loans confirming the retreat – and even if you don’t subscribe to the theory that debt needs to keep rising to sustain the building industry – it’s hard to see any growth in the sector any time soon.

Heaven help us if our terms of trade should falter, cause without the China machine to feed, we’ll be waving goodbye to the two-speed economy for all the wrong reasons.

First up , building approvals are traditionally soft in the early part of the year – but even after stripping this effect out it is clear that approvals are rolling over.

First home buyers have deserted the markets and are now being joined by more seasoned campaigners.

Not since the introduction of the GST in 2000, has the average size of loans actually fallen year on year. With first home buyers leading the charge, it looks increasingly likely that we’ll be visiting the dark side of the ledger in the not too distant future:

Which brings us to the state of the household balance sheet.  According to the RBA, household debt – that is the aggregate of owner occupied and investment property loans plus personal debt – continues to grow but at ever slower rates.  If house prices are to fall over the coming quarters, then the chances are that pretty soon the Australian consumer will join those of the US in outright deleveraging.

All-in-all not a great outlook from the engine of the economy – the housing sector.

At first blush, recent releases suggest a more positive tone – total volume of housing debt looks to have broken its downtrend (from ABS’s release here):

Principally driven by a jump in the total number of loans (ABS data here):

But this is where the good news ends. Certainly the decline in the average loan size to first home buyers suggests a different story:

This is not good. First home buyers are the veritable engine of the housing construction industry and by extension vast tracts of the Australian economy. Not surprisingly then, building approvals (ABS release here) look to have turned lower:

If the jump in housing finance is being driven by older demographics thinking recent softness in housing prices is a buying opportunity, we may soon see this resolve tested. SQM Research (here) reckons property listings across Australia were up 44% on a year-on-year basis to December (for a little bit of fun you can check out the change in listings in your own neighbourhood here).

Conclusion – a property price correction looks like short odds for 2011 – expect our various government’s to throw more money into the housing pit.

]]> http://www.datadiary.com.au/2011/01/18/australian-housing-finance-update-confirming-the-turn/feed/ 3 http://www.datadiary.com.au/2010/12/01/australian-lending-housing-finance-still-growing-in-october/ http://www.datadiary.com.au/2010/12/01/australian-lending-housing-finance-still-growing-in-october/#comments Wed, 01 Dec 2010 03:38:53 +0000 Rohan Clarke http://www.datadiary.com.au/?p=3962 Monetary aggregates for October released yesterday by the RBA (here). They show housing finance remains stubbornly in growth mode:

While the imbalance between housing finance and business lending continues to widen:

Credit to Steve Keen too for his submission to the Senate enquiry into banking (here) – well worth the read if you have time. He may have positioned himslef as an outsider, but his analysis is nonetheless spot on.

Not that I agree with his recommendations – being impractical in the extreme. For mine, the simplest solution is to vary capital adequacy requirements with leverage in the system.  This is what a prudent bank should be doing in any event.

I have little doubt that if it was their own hard earned existence that was at stake, the management of banks would be a little less cavalier about their loan books and provisioning against them.  The problem is one of agency. Management are incentivised to ramp up risk cause that is the way they maximise their incomes.  Shareholders seemingly benefit from greater leverage, until they don’t.  While it’s the taxpayer that has been shown to ultimately carry the can. Maybe it’s time for a return of the debtor’s prison – it was a pretty neat regulator for the early bankers to manage their risk books.

The data

The ABS releases (based on August data Housing Finance here and Lending Finance here) suggested that housing related lending continued to ease.

Yet the RBA’s credit aggregates suggested that household debt kicked back up again in September – growing at 8.1% annualised for the month (RBA release here).

While the RBA updated its household leverage data – which confirms that against disposable income measures, leverage is back to historical highs (note this is to end of June).

So where are we in the cycle?

If household debt has been rising at >10% per annum for over a decade, yet retail trade and new car sales have been rising at ~3% per annum (see yesterday’s post here), then where has that extra debt been flowing to? Answer – House prices.

Is this a reflection of a shortage of housing ‘supply’? Perhaps – though ’cause and effect’ is not straightforward in the real world.

I’d argue low interest rates have been a key driver of housing demand over the last decade. As is patently clear to all in a post-credit bubble world, asset prices were inflated in a self reinforcing cycle with expanding and cheap debt. If the population has been growing at between 1% and 2% p.a. across the same period, then the rise in demand beyond this has been due to declining housing density – that’s the number of people sharing a dwelling.  At some point higher house prices (relative to disposable income etc) will stop this trend – the evidence suggests we are already past the turn.

The housing sector is the key driver of the Australian economy. The cycle is turning down – slowly but surely.

It’s the housing sector that continues to support debt growth, though lending to business has stabilised and the government is doing its bit for Queen and country:

Zooming in on growth in housing sector debt, we can see that it is at historically low growth rates.

Which brings us to the Chart of the Day – it takes a look at lending by sector as a proportion of the total.  From 1990, the housing sector has risen from 20% of total lending to more like 55% currently.

Now it could well be argued that the business sector went through a property fuelled credit binge of its own that imploded in 1990, and hence the initial decline in its percentage was something akin to ‘normalising’. But still with the likes of Centro, Allco and Babcock et al doing some seriously heavily lifting more recently, don’t think we can argue that the housing sector was alone in enjoying the credit boom.

So what does it mean? While the housing sector has been shown to be the engine room of a developed economy – given it’s multiplier effect on consumption that makes up ~70% of GDP – making more houses doesn’t really add to the productive capacity of an economy. If the villagers spend all their time carving huge stone heads to put in their living rooms, then who is left to tend the crops? This trend goes a long way to explaining why GDP growth has failed to keep up with house price growth – or more simply why our incomes haven’t kept pace with mortgages.

With the ratio of personal debt (including housing) to commercial debt dropping from the highs achieved during the height of the government stimulus efforts.

There’s a reasonable probability that this ratio will continue to head south given the relatively low levels of gearing across the corporate sector versus the relatively high levels in consumer’s hands. The moving average trendlines in each would suggest that this shift is underway.

Looks okay I guess – and that was the general response from our mainstream media (see the ABC’s coverage “Housing finance rises in July – but caution remains). As Westpac senior economist, Andrew Hanlan, said “It’s probably best to describe it as sort of levelling out at this stage, but we do expect to see an improvement in coming months with the RBA likely to be on hold for the rest of this year”. You’d expect that with ~40% of the housing loan market, Westpac would be pretty well informed.

But still I’m less optimistic. As we have suggested before (here), house price to disposable income ratios remain at elevated levels which at the very least limits the appetite for new housing debt.  This is perhaps why when I look at a chart of new lending the trend appears to be down – though admittedly it’s all in the interpretation and we are already plumbing depths not seen since we entered the new millenium:

A key variable in this are the first home buyers, as they were an important catalyst in reigniting loan volumes through 2008. Post the government handouts though, loans to first home buyers have returned to more sustainable levels. Without more government stimulus, they are unlikely to be leading the charge back up the hill.

But to me the charts that really undermine the outlook for the housing sector are the following:

Housing finance has grown at over double the rate of GDP since the mid 70′s. We can see the effect of this in the increasing leverage to disposable income across the period. In turn this has been enabled by the trend to lower interest rates. The recent experience of a smorgasbord of countries suggests that the time for increasing household leverage is gone. How likely is it then that we are likely to see “improvements in coming months” – whatever that might mean?

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