Housing loan commitments continue to fall, but are still above pre-pandemic levels

We keep track of housing finance approvals as they are a good "leading indicator" of what's ahead for our property markets.

Based on the latest data released by the ABS, new housing loan commitments fell 4.3% month on month in December, its eleventh consecutive month of decline, to be at its lowest level since October 2020.

On an annual basis the value of loan commitments is down ‑29.3% year on year, but is still 22.8% above their pre-pandemic February 2020 levels.

Further declines are expected as the significant monetary tightening to date washes through.

And following the release of latest CPI figures, it is expected that RBA will to hike rates by 25bps in February and probably again in March, taking the cash rate to 3.60%.

It is property values that are holding up the nominal value of loan approvals

The result is housing loan commitments are falling sharply and are likely to continue to head lower amid deteriorating housing market sentiment and as higher rates bite borrowing capacity.

Interestingly the reason why the value of new loan commitments has remained high relative to pre-pandemic is mostly about house price growth during the pandemic.

The actual number of owner-occupier finance commitments is now 9.9% below pre-pandemic December 2019 levels.

In contrast, the implied average housing loan commitment value is still 21.9% above pre-pandemic levels on our calculations.

Tapas Strickland, Head of Market Economics at NAB commented:

"Our prior research on this topic highlighted that by using fixed rates, there has been a 32% fall in potential borrowing capacity.

NAB currently forecasts a peak-to-trough fall in capital city dwelling prices of 20% by the end of 2023 and we largely see the adjustment in coming through reduced borrowing capacity."

Loan commitments by State

The number of loans for the construction or purchase of new homes declined in all jurisdictions in 2022 compared to 2021:

• Tasmania (-44.0 per cent),
• Western Australia (-43.2 per cent)
• South Australia (-41.6 per cent)
• Queensland (-38.1 per cent)
• the Northern Territory (-34.5 per cent)
• New South Wales (-31.4 per cent),
• Victoria (-30.5 per cent),
• Australian Capital Territory (-7.6 per cent).

Big pickup in refinancing activity

In 2023 there is also a wave of fixed-rate refinancing and in the latest data, the refinancing share remained elevated at 52.9% of total lending activity.

With around 70% of fixed-rate loans due to mature by the end of 2023 and the flow of new mortgage activity slowing sharply, the refinancing share of activity is likely to pick up further.

The peak quarters for fixed loan maturities are Quarter 2 and Quarter 3 2023 – during the peak of the pandemic, the refinancing share rose to 58%.

HIA suggests the RBA should pause.

While "the market" is expecting another interest rate rise next week, HIA’s Chief Economist, Tim Reardon feels the RBA should pause its rate hiking cycle, saying

“Lending for the purchase and construction of a new home has fallen to its lowest level since 2012, even before the full impact of last year’s cash rate rises take hold.

The ABS released the Lending to Households and Businesses data for December 2022 today, and it shows that there were just 4,797 loans issued for new housing, the lowest level since November 2012,

Lending for new homes is now down by 62.4 per cent since its peak in January 2021.

It is concerning that this downturn to date doesn’t reflect the full impact of the RBA’s rate hiking cycle of 2022.

There are significant lags between a change in the cash rate and its impact on the economy.

The economy needs time to digest the full impact of interest rate hikes before the RBA considers further action.

We are already seeing signs of a very significant slowdown in a leading part of the economy.

Industry needs stability, and the RBA won’t achieve this by sending the housing sector through boom-and-bust cycles.

We don’t want to see a housing downturn gain momentum. Official data on the impact of interest rates if very lagged and appears that it is much easier to strangle the economy than it is to kick start it.

This is not the same cycle we were on in the 1980s. We don’t need to crash the economy in order to save it. It took a decade to recover from the rate hiking cycles in the 80s, and this is a very different cycle.

The supply chain disruptions of the pandemic are easing. Inflation in other economies is slowing and interest rates are not the only tool at governments’ disposal to address the inflationary problem,” concluded Mr Reardon.

The number of loans for the construction or purchase of new homes declined in all jurisdictions in 2022 compared to 2021,

• led by Tasmania (-44.0 per cent), and followed by
• Western Australia (-43.2 per cent),
• South Australia (-41.6 per cent),
• Queensland (-38.1 per cent),
• the Northern Territory (-34.5 per cent),
• New South Wales (-31.4 per cent),
• Victoria (-30.5 per cent),
• and the Australian Capital Territory (-7.6 per cent).

Source of charts and some commentary: NAB and HIA

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.