Australia | Feb 11 2009
By Andrew Nelson
At last, some good news: housing finance approval numbers for owner occupiers increased by 6.4% in December, well ahead of expectations for a 3.5% increase. The jump in housing finance numbers, which was the first decent rise in almost a year and a half, can be attributed to the Government’s decision to increase the First Home Owner’s Grant and the reduction in mortgage interest rates from the RBA’s aggressive easing policy.
The increase in commitments was not just limited to numbers, with the value of finance for owner occupiers also up a very healthy 7.1% in the month. TD Securities Senior Strategist Joshua Williamson notes that housing finance numbers have been in recovery mode for the last three months, but the rate of recovery had been more modest until today.
With the rate of recovery ratcheting up a gear in December, Williamson now expects housing finance to rise further in the months ahead. However, as unemployment begins to lift significantly, the pace of recovery will be crimped, he warns.
The read was also great news for the housing market, particularly for the new housing market segment. The proportion of first home buyers seeking finance increased to 25.4% in December, the largest amount in 7 years.
All up, the number of home loans to first home buyers has risen over 40% in the two full months since the Economic Security package was announced.
But don’t get to carried away with the good news, as Williamson expects the extent of the weakness in the data over 2008 still suggests that new housing construction will remain sluggish until mid-year at the earliest. That said, a further lowering in mortgage interest rates from the February RBA policy easing should further fuel new housing demand by improving the affordability for more potential. This should lead to an improvement in construction trends in the second half of the year.
This assumption is backed by investor finance rising 2.9% in the month. Westpac economists note reports, which were also cited by the RBA in its last market update, that some potential developers have been finding it difficult to obtain funding in the current environment. Hopefully, this will now improve.
ANZ economist Alex Joiner agrees with Williamson, saying the strong upturn in finance for construction, up 9.2%, and purchases of new dwellings, up 15.2%, may help stem the decline in building approvals and activity in 2009. The tripling of the first home owners grant for new housing should also help to support construction lending levels.
While this all represents some much needed good news, Joiner warns the outlook for approvals and the property markets must be viewed cautiously, as a deepening economic downturn and the potential for unemployment to rise sharply will no doubt subdue property market activity to some extent. As such, he doesn’t expect to see a repeat of today’s large increase in approvals going forward. But he does expect to see a more gradual upward trend.
CBA economist Sara Hoenig also expects housing finance will continue to receive support from the mix of fiscal and monetary policy stimulus. The increased first home buyers grant is available until June. She also expects the RBA to cut rates by another 100bps in February and further cuts to remain on the cards.
This leads Hoenig to predict the RBA will pause for breath in March and deliver a 50 basis point cut in April, bringing the cash rate to 2.75%. TD’s Williamson is a little more extreme in his assessment, saying that while the RBA will welcome the housing finance data, virtually every other partial data set still points to substantial headwinds for the Australian economy.
Sure, the RBA can ease the burden with more assertive monetary easings and Williamson thinks this will be required to minimise the extent and duration of the current recession. He is looking for a 75bp rate cut in March and a 50bp follow up in April, taking the cash rate target to a low of 2.00%.
