Despite an initial slump in housing finance through the beginning of the year due to the COVID-19 pandemic, the year to October 2020 saw a remarkable 14.5% lift in the volume of finance secured for the purchase of property, according to ABS lending indicators.
This was mostly driven by a $15.8 billion increase in lending to owner-occupier, changeover buyers (such as upsizers and downsizers), followed by a $13.5 billion increase for first home buyers and an additional $476 million for investor purchases.
The first home buyer cohort saw the fastest growth rate in finance for the year to October, at 35.1%; first home buyer finance accounted for 22.1% of lending, up from 18.8% in the year to October 2019.
The rise of the first home buyer can be attributed to several factors:
Generational trends. As at June 2019, Australia had a particularly large number of 25-34 year olds relative to other population age groups.
This is significant because 25-34 was the most common first home buyer age within the ABS housing and occupancy data.
Monetary and fiscal incentives. Compounding the demographic surge in first home buyer demand are record-low mortgage rates, thousands of LMI waivers through the first home loan deposit scheme, Homebuilder grants and various state-based incentives for first home buyers.
State-based incentives include larger stamp duty discounts for first home buyers across NSW.
Victoria has followed suit in its 2020-21 budget, waiving up to 50% of stamp duty obligations for eligible purchasers up to June 2021.
Lower dwelling values and competition. First home buyer participation has increased during times of significant economic shock that have induced price falls.
The retreat of investors to a record low 23.3% of the mortgage market as at October may also reflect less buyer competition for owner-occupiers.
With mortgage rates at record lows, and banks continuing to compete for borrowers which would provide steady returns, refinancing activity should remain elevated in the coming months.
Institutional responses in the pandemic, and implications for housing markets Since the onset of COVID-19, a number of changes in monetary and fiscal policy has shaped the housing market.
The release of further detail on mortgage deferrals also illuminates the state of financial stability in Australia, and has implications for housing market performance.
From a monetary perspective, the RBA cut the cash rate target to 0.1% on the 3rd of November.
The move came as eased social distancing restrictions meant a further reduction would have greater effect in stimulating spending and aiding economic recovery.
Other measures were announced alongside the rate cut, including:
- A reduction in the yield target on 3-year government bonds from 0.25% to 0.1%;
- A reduction in the interest rate of new drawings from the term funding facility (TFF) to 0.1%;
- A reduction in the interest rate on exchange settlement balances to 0%; and,
- An historic adoption of quantitative easing, through the purchase of federal and state government bonds.
The main implication for the housing market will be lower mortgage rates, as bank funding costs are lowered.
The low cash rate setting, which may be in place for years to come, will likely cause housing values to rise.
This is supported by the chart below, which shows the cash rate alongside the monthly change in dwelling values across Australia.
Periods of cash rate target reductions often coincide with, or are closely followed by, periods of growth in dwelling values.
A notable exception to this relationship was the cash rate reductions over March, where the initial shock of COVID19 and subsequent social distancing may have delayed the impact of low rates on housing demand.
With consumer sentiment surging 14.8% between September and November, and social distancing measures continuing to ease, low rates are more likely to put upward pressure on prices.
Since March, typical outstanding mortgage rates have fallen around 20 basis points, and average new mortgage rates are around 30 basis points lower.
Average mortgage rates over the month of September are summarised in the table below.
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The moderation of these policies through the banking sector has further implications for how housing demand will be impacted.
Since the target rate reduction in November, fixed rate home loans have already been reduced by each of the major banks.
Property investors have not been afforded the same discount as owner occupiers, which could further skew finance and property demand to owner-occupier purchases.
Fiscal stimulus for housing since the onset of the pandemic has been almost entirely directed at the establishment of new property.
Since the announcement of the HomeBuilder Scheme in early June, ABS housing finance data has recorded over 24,000 loans for the construction of owner-occupied property through to October.
This is a 39.0% increase on the number of loans for the same period in 2019.
Similarly, national house approvals rose 14.0% from June to October compared to the same period in 2019, though unit approvals declined -11.9%.
This may reflect housing stock preference among owner-occupiers, where the scheme is targeted.
It also reflects the tight timelines of the original scheme, however, whereby construction had to commence 3 months from the contract being signed (though this was extended to 6 months in Victoria amid social distancing restrictions).
Given the lag between off the plan unit sales and project commencement, this may have funneled use of the grant into house and land projects.
As with many fiscal stimulus policies introduced through the pandemic, there was mounting pressure to extend the HomeBuilderscheme.
On the 29th of November, the scheme itself was extended to the end of March 2021, though at a lower grant of $15,000.
The date at which construction has to commence has been extended from 3 months from the contract date to 6 months from the contract date.
The initial value cap on the scheme of $750,000 for new house and land projects may have skewed utilisation of the grant to more affordable markets, such as outer suburban and regional Australia.
In fact, between June and August, the rolling 3-month sales volume of new homes increased 22.2% nationally, but 30.8% across the combined regional market.
The value cap on the HomeBuilder scheme has since been lifted in NSW and VIC to $950,000 and $850,000 respectively.
In the federal budget, the first home loan deposit scheme was extended by an additional 10,000 places, though only for new property.
A range of other state-based incentives have been handed down for first home buyers, including further stamp duty concessions from the NSW government for the purchase of new housing.
Home loan freezes and the impending ‘deferral cliff’
As noted in previous reports, the expiry of deferral arrangements for mortgage holders affected by COVID19 presents a level of risk for housing markets.
However, October saw the biggest monthly drop in the portion of home loans deferred, at a time when house prices rose nationally.
From September to October, deferrals fell from 7% to 4% of housing loans.
Furthermore, institutions may choose to extend concessions further, despite timelines on changes to capital treatment of deferred loans.
In July, APRA extended the temporary capital treatment for deferred bank loans to March 2021.
But CBA have reportedly placed a moratorium on foreclosing against customers unable to return to normal payments due to COVID, until September 2021.
The risk posed by the end of repayment deferrals may be mitigated by its coinciding with property price rises.
With only 10% of housing loan deferrals exposed to a loan to value of greater than 90%, rising home values reduce the risk of negative equity where the borrower is forced to sell.
While there are still markets where these deferrals may be concentrated, housing finance conditions across Australia seem stable at the aggregate level, and the risk of high stock levels putting deferred borrowers into negative equity seems to have reduced.