Surprise rise in property commitments

At a time when property values are down and below average transaction volumes are at play, the latest Australian Bureau of Statistics (ABS) housing finance data are surprisng, showing that the number of owner occupier finance commitments actually increased over the past five months.

So what does this mean for housing values and volumes in the future?

Over August, owner occupier finance commitments increased by 1.2% and over the year they have increased by 6.2%. Although the latest ABS figures are encouraging, most of this increase is due to loan refinancing.

In August, refinances increased by 1.7% over the year compared to a 1.0% increase in non-refinances. Although both refinances and non-refinances have increased over the past five months, refinances are up 24.9% over the year whereas non-refinances (new lending), has increased by a lower 7.8%.

Focusing on the total value of housing finance commitments which includes both investor and owner occupier commitments, owner occupier commitments rose 0.6% in August, investor commitments rose by 1.8% and overall commitments increased by 1.0% in value terms. Owner occupier finance commitments now account for almost 70% of all commitments compared to 30% for investors.

Once again, when refinance commitments are stripped from the figures, the results are not as strong; the total value increased by just 0.1% over the month.

The total value of refinance commitments rose by 29.3% over the month. Refinance commitments also accounted for 22% of the total value of all housing finance commitments in August.

Based on volume and value, the results show that there is certainly significant activity in the refinance sector in the current market.

Stripping out the refinance data is very important for the housing market as it is not reflective of a new property transaction.

Of course brokers earn commission on the transaction and money changes from bank to bank but for real estate agents and property developers it does not reflect any new business. The total value of refinance commitments has risen by 29.3% over the 12 months to August 2011 whereas the total value of all loans excluding refinances is actually down by -1.8% over the year.”

Many often speak of the growth in housing credit over recent years and its impact on the housing market. As the data reveals, the correlation is particularly strong when refinances are removed from the equation. With a fall of -1.8% in the value of housing credit for the year (excluding refinances), the prospect of a substantial improvement in values seems unlikely.

The ABS results also show that sales volumes have a strong correlation with housing credit; the data highlights the annual change in housing credit (excluding refinances) against the annual change in sales volumes across the country’s three largest cities.

This is a logical correlation because if there is demand for housing finance there will be demand for the buying and selling of homes. He said that at the moment demand is quite weak and as a result, sales volumes are also weak.

While to some the latest ABS data may appear as unwelcome news, for anyone in the residential property sector it is not all bad because as I mentioned previously, finance commitments for both refinances and non-refinances have increased for the past five months.

In annual terms, the total value of housing finance commitments with refinances removed has fallen by -1.8% over the 12 months to August. However, the annual decline reached a trough of -15.8% in April 2011 so it looks as if things are starting to improve a little.

Many experts are now forecasting that the next move in interest rates will be down. If these forecasts do prove to be correct, there will be some improvement in housing affordability and there may be some improvement in demand for housing finance.

Of course any improvement emanating from such a situation will be counterbalanced by the fact that jobs growth has slowed, consumer confidence remains weak (despite the recent September and October improvements in the index) and the propensity for households to spend is low with savings high and retail trade weak.