Why Mortgage Loans Are Growing Slower Than House Prices

The RBA, in today’s monetary statement discusses the relationship between loan growth and house prices. They conclude that factors including fear of unemployment, low supply, high loan to income ratios and stamp duty are all contributing factors, as well as price hikes themselves.

Indicators of conditions in the established housing market, such as housing prices, housing turnover and new borrowing, are interrelated and often move together quite closely (Graph A1). However, in recent years, housing turnover and loan approvals have risen by less than housing prices when compared with previous cycles in the housing market.


Turnover and loan approvals are closely linked. Each new housing loan represents a new transaction in the housing market (as long as it is not used to refinance an existing property or construct a new dwelling). Hence, the value of new borrowing will grow at about the same rate as the value of turnover as long as the average loan-to-valuation ratio does not change too much. In Australia, it turns out that the relationship between new borrowing and turnover has been quite stable for the past decade or so (Graph A2).


Housing prices and turnover might move together over time for a number of reasons, although the relationship may not be quite as tight as that between turnover and loan approvals (and it is possible for prices to rise with only limited turnover). One strand of research has found that an increase in housing prices causes an increase in turnover because higher housing prices increase the net wealth of homeowners. This allows those owners who did not previously have a large enough deposit to trade up to a more expensive dwelling, thereby increasing turnover. A complementary strand of research has found that the causality can also run in the other direction, from turnover to housing prices.

It suggests that some vendors might discern a rise in housing demand by observing a rise in turnover, thereby encouraging them to raise their reserve prices.

Turnover and housing price growth have moved together over time, although the relationship appears to have weakened somewhat in recent years. The change is most evident in Sydney and Melbourne, where growth in housing prices has been strongest of late (Graph A3). The rate of turnover has remained low in those cities, both in terms of their longer-term averages and relative to growth in housing prices.


It is difficult to know why the turnover rate has remained relatively low compared with its history and compared with prices. There is tentative evidence to suggest that existing homeowners have become more reluctant to borrow against increases in their net wealth to trade up homes. For example, the survey of Household Income and Labour Dynamics in Australia (HILDA) suggests that in 2011 and 2012 (the two most recent survey years) a smaller share of households bought larger homes than in any of the previous nine survey years. Also, there has been unusually low participation of owner-occupiers in housing market transactions recently (Graph A4). The reasons are not clear, although it partly reflects the fact that state government incentives for first home buyers have been redirected away from established dwellings towards new dwellings.


One possibility is that a reluctance to trade up homes reflects households generally becoming less willing to take on additional debt in recent years. Following the increase in leverage over the 1990s and early 2000s, the debt-to-income ratio has been stable at high levels. Although interest rates are currently low, the expected repayment burden on loans is at 10-year average levels, when calculated using a longer term interest rate to account for the expectation that variable interest rates will move up over time. Indeed, in New South Wales and Victoria, which have experienced the greatest disparity between housing prices and turnover relative to historical norms, the share of current income required to service an average loan over the next 10 years is close to historical highs.

Another consideration is that homeowners may be less willing to borrow more because growth in labour income has slowed. Nominal labour income has grown at an average annual rate of 2.7 per cent over the past two years, compared with a decade average of 6.2 per cent. And the widespread expectation is that wage growth will remain subdued for a time. Moreover, the Westpac-Melbourne Institute survey suggests that the share of households expecting more unemployment a year ahead has been at above-average levels since late 2011, which is an unusually long time by the historical standards of the survey.

Repayment obligations, in combination with uncertainty about future labour income, are an important consideration for homeowners. According to liaison with banks, one consequence of this environment is that an increasing share of owner occupiers is opting for interest-only loans to increase repayment flexibility.

A reluctance to trade up homes might also stem from increases in effective stamp duty rates. In some states, including New South Wales and Victoria, the nominal housing price thresholds at which higher rates of stamp duty apply have not changed for a number of years. As housing prices have risen, more buyers have fallen into the higher stamp duty brackets, acting as a disincentive to purchase housing. In New South Wales, for instance, the stamp duty paid on a median-priced home has grown to around 25 per cent of annual disposable income per household, from close to 10 per cent in 1991.

Finally, the relationship between turnover and housing prices can be affected by developments in housing supply. Additions to the housing stock have been relatively low in some states over recent years, which would weigh on the rate of turnover as it is currently measured, while low supply relative to demand would also put upward pressure on prices.


Unemployment – State Trends – ABS

The ABS data for October includes state by state splits, which when analysed highlight some interesting trends. Tasmania has the highest rate, though it has been coming down lately. SA is also high, but reducing a little. QLD and VIC appear to march in step, but both moving up. NSW, which lifted earlier in the year, appears to be levelling out, in line with the recent economic rebound. WA continues to rise a little, from a lower base in 2012, the peak of the mining boom.  NT rates are low, and in the ACT we see a significant trend shift up (though on small numbers), reflecting reduced numbers of civil servants. Cross state averages hide these important differences.



Unemployment Rate Steady – ABS

The latest data from the ABS was released today, providing an updated view of unemployment.  The underlying trends remain, despite the fact that the seasonality of the labour force data has been re-estimated with specific adjustments made for the changed pattern of supplementary surveys. These adjustments have been applied to the seasonally adjusted series from December 2013 onwards.

Based on trend estimates:

  • Employment increased to 11,589,000 from a revised September 2014 estimate.
  • Unemployment increased to 768,700.
  • Unemployment rate remained steady at 6.2% from a revised September 2014 estimate.
  • Participation rate remained steady at 64.6%.
  • Aggregate monthly hours worked increased 0.4 million hours to 1,607.9 million hours.

Seasonally Adjusted:

  • Employment increased 24,100 to 11,592,200 from a revised September 2014 estimate. Full-time employment increased 33,400 to 8,058,500 and part-time employment decreased 9,400 to 3,533,700.
  • Unemployment increased 7,100 to 772,100. The number of unemployed persons looking for full-time work decreased 10,900 to 532,100 and the number of unemployed persons only looking for part-time work increased 18,100 to 240,000.
  • Unemployment rate remained at 6.2% from a revised September 2014 estimate.


  • Participation rate increased 0.1 pts to 64.6%.


  • Aggregate monthly hours worked increased 24.9 million hours (1.6%) to 1 ,614.4 million hours.

ABS Adjust Labour Force Stats Again

The ABS have now reworked the seasonally adjusted numbers, which effectively lifts the unemployment rate slightly.

In the time since the September 2014 labour force estimates were released, the ABS has systematically assessed the effects of each supplementary survey on the labour force estimates. Significant effects have been found for some supplementary surveys, with little or no measurable impact caused by others. As a result of this analysis, an approach has been developed to re-estimate the seasonality of the labour force data with specific adjustments made for the changed pattern of supplementary surveys. This approach will be adopted for the October 2014 labour force release and will result in revisions to the previously-estimated seasonally adjusted (and consequently the trend) results.

In practice, the new seasonal methods should be used to revise the seasonally adjusted estimates for every month in the labour force estimates (i.e. from February 1978 to October 2014). However, checking the consistency of every series from 1978 is not possible in the short time available (the seasonal adjustment process is based on adjusting at a detailed level and aggregating the component series to the totals for persons employed and unemployed) even though the impacts will be small for most months.

The most urgent need has been to resolve the problems in the last few months in the time series. Therefore, as an interim measure, the new approach has been used only from December 2013 to October 2014. In practice, the impact of this interim measure on the percentage changes in seasonally adjusted persons employed and unemployed between November and December 2013 is minimal.

The revised methodology will be applied in future months. In addition, work will continue on refining the methodology and verifying the changed seasonal factors for the full length of the monthly series. The ABS expects to revise all the seasonally adjusted data in conjunction with the annual seasonal reanalysis in early 2015.

The Labour Force Survey uses the concurrent seasonal adjustment method to derive seasonal factors. Concurrent seasonal adjustment uses data up to the current month to estimate seasonal factors for the current and all previous months. This process can result in revisions each month to estimates for earlier periods. However, in most instances, the only noticeable revisions will be to the seasonally adjusted estimates for the previous month and one year prior to the current month. Concurrent seasonal adjustment will continue to be used during the next few months. However, as an interim measure, any revisions to seasonally adjusted estimates will be restricted to the period from December 2013 onwards until the annual seasonal reanalysis is completed in early 2015.

Setting the seasonal factors to one for the seasonally adjusted unemployment estimates for July, August and September 2014 published on 9 October resulted in a slight downward bias in the number of persons unemployed and the unemployment rate for those three months. This was not observed in other series and has been rectified by the new seasonal analysis.


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Building Approvals Flat In September – ABS

ABS Building Approvals show that the number of dwellings approved were flat in September 2014, in trend terms, holding steady for the last two months. Approvals of house dwellings has been declining slowly in trend terms for the last 6 months. The seasonally adjusted estimate for total dwellings approved fell 11.0% in September after rising for two months.

Dwelling approvals increased in September in the Australian Capital Territory (4.0 per cent), South Australia (1.3 per cent), Western Australia (0.9 per cent) and Queensland (0.7 per cent), but decreased in Tasmania (5.1 per cent), the Northern Territory (1.7 per cent), New South Wales (1.0 per cent) and Victoria (0.6 per cent) in trend terms.

In trend terms, approvals for private sector houses fell 0.2 per cent in September. Private sector house approvals fell in Victoria (1.8 per cent), South Australia (0.7 per cent) and Western Australia (0.3 per cent), but rose in Queensland (1.7 per cent) and New South Wales (0.9 per cent). The seasonally adjusted estimate for private sector houses fell 2.3% in September and has fallen for two months.

The value of total building approved rose 0.1 per cent in September, in trend terms, following a fall of 0.2 per cent in the previous month. The value of residential building fell 0.6 per cent and the value of non-residential building rose 1.4 per cent in trend terms. The seasonally adjusted estimate of the value of total building approved fell 9.5% in September following a rise of 1.9% in the previous month. The value of residential building fell 16.1% following a rise of 5.5% in the previous month. The value of non-residential building rose 5.3% after falling for two months.


A Perspective On Negative Gearing

There is no doubt that negative gearing is a hot issue. As the ASIC Money Smart web site says:

Negative gearing is when your income from an investment is less than your expenses. In the case of property this means the rental income you receive is less than the interest and other expenses you pay. Your investment is making a loss which most investors hope they will make up with a capital gain when the value of the property increases. A loss can be used to reduce your taxable income which will reduce the amount of tax you pay. See the Australian Taxation Office’s section on residential rental properties for details of income you must declare and expenses you can claim. Remember, you are only reducing your tax payable because the income from your investment isn’t covering your expenses.

In the year to 2012, the ATO reported that whilst income from rental properties reached $33bn, the total tax offsets including interest costs were $49.6bn, leaving a net loss to the tax payer of $8bn. So, negative gearing costs. The chart below shows the trend for recent years. Well over 1.2 million households gear into property, and two in three reported a loss (to offset income elsewhere). The RBA’s Financial Stability Report, illustrated that the top fifth of income earners hold around 60 per cent of investment housing debt.

RentalTaxIncomeTo2012Now, many argue that negative gearing is essential to support house building and the rental sector, and should not be touched. However, the data tells a different story. We went back to our household surveys, to examine the penetration of gearing. First, we looked at those borrowing for owner occupation, versus for investment purposes. No surprise that more were property investors. However some owner occupied households also geared their property into, for example stock market investments. Recently, the growth in investment gearing has been much stronger. We already know this is being driven by expectations of future capital growth, as reported in our earlier posts.

NegativeGearing2Then we looked at the type of property geared. We found that whilst a proportion were geared into new property, most were gearing into existing property, for rent.

NegativeGearing1No surprise, given the growth in loans for investment purposes, and only a small proportion go towards new builds.

PCInvestmentLendingAug2014So, we conclude that gearing has more to do with stoking prices in the established market than directly stimulating new building. Rents are set as a combination of the costs of a property, and income levels. If prices were more realistic, rents would be lower, because loans would be lower. More rentals loose money than make money today, and the only saving grace in the minds of investors is hoped for future capital growth.

A more logical approach would be to focus, from this point forward negative gearing on new builds only, thus helping to boost supply and stabilise prices. Appropriate transition arrangements for existing gearing would be needed, but the current arrangements are not fair, and will become an even greater drain on government coffers if interest rates (and net rental losses) rise.

Latest CPI Is Down To 2.3%

The ABS published their September CPI data.

The all groups (average across 8 capital cities) rose 0.5% in the September quarter 2014, compared with a rise of 0.5% in the June quarter 2014. On a yearly basis, the CPI rose 2.3% through the year to the September quarter 2014, compared with a rise of 3.0% through the year to the June quarter 2014.

CPI-Sept-2014The most significant price rises this quarter were for fruit (+14.7%), new dwelling purchase by owner-occupiers (+1.1%), property rates and charges (+6.3%) and other services in respect of motor vehicles (+5.8%).

The most significant offsetting price falls this quarter were for electricity (-5.1%) and automotive fuel (-2.5%).

Note though that the Consumer Price Index (CPI) measures price change for consumption goods and services acquired by Australian resident households. The Australian Government repealed carbon pricing with effect from 1 July 2014. It is not possible to quantify the impact of removing the carbon price on the price change measured by the CPI.

This is likely to be a further sign that interest rate rises will be further delayed (there is no pressing inflation problem at the moment).  We discussed this yesterday.


The UK’s “Twin Peaks”

Speaking at the Kenilworth Chamber of Trade business breakfast event Andrew Haldane, the Chief Economist of the Bank of England, discussed developments in the labour market, and the implications for monetary policy in the United Kingdom. His perspective is important and relevant in the Australian context.

The main messages of Andrew’s speech are:

  • In June, as he made clear in a speech, he put even weight on moving interest rates sooner (which he termed being ‘on the front foot’) and moving interest rates later (being on the back foot).  Three months on, the statistics now appear to favour the back foot.
  • Recent evidence, in the UK and globally, has shifted Andrew’s views about the likelihood of weaker outcomes.  That reflects markdowns in global growth prospects and weak pipeline inflationary pressures, both from wages and prices internally, and energy and commodity prices externally.  He is gloomier about demand and sees inflationary forces weakening in the near term.  This implies that interest rates could remain lower for longer than he had expected three months ago, without endangering the inflation target.
  • Turning to the performance of the UK economy, Andrew notes various reasons to be cheerful: ‘growth at the top of the G7 league table’ and ‘well balanced between consumption and investment’;  ‘borrowing costs at exceptionally low levels’; ‘employment up 1.8 million since its trough’ and unemployment falling from 8.4% to 6%, and expected to fall further. The combination of GDP growth, inflation and unemployment suggests that the economy is in ‘fine fettle’ and has only been bettered in 5 of the last 44 years.
  • But looking at a different set of indicators suggests ‘reasons to be fearful’.  ‘Growth in real wages has been negative for all bar three of the last 74 months’.  ‘The level of productivity is no higher than it was six years ago’.  And real interest rates are around zero.  This combination of poor economic outcomes is ‘virtually unprecedented going back to the late 1800s, with the exception of the aftermath of the world wars and the early 1970s.’
  • Andrew concludes that the economy appears to be ‘writhing in both agony and ecstasy.  It is twin peaked’.
  • Looking forward he suggests that the key issue is which of these twin forces will win out.  The Monetary Policy Committee’s forecast suggests that by 2017, ‘productivity growth and real wage growth are back to around 2% and real household deposit rates are in positive territory’ or in other words ‘the sun will come out tomorrow’.  But Andrew notes that such forecast have been confounded in the past, and he also notes that the low level of expected real interest rates implied in the UK’s yield curve may reflect pessimistic assumptions about future growth prospects.
  • Turning to the labour market he finds more evidence of polarising patterns: ‘the upper peak of the labour market is clearly thriving in both employment and wage terms.  The mid-tier is languishing in both employment and real wage terms.  And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole’.
  • Turning to the implications for interest rates, he suggests that financial market participants must weigh up the likelihood of the UK taking a strong path or a weak path – the twin peaks he has been discussing.   ‘Over the past few months, the implied path for interest rates has shifted down’.  ‘One interpretation of that move is the market now assigning a somewhat higher probability to the lower peak’.  That is also his own assessment of how the balance of risks has shifted.

Refinancing; An Important Driver Of Housing Finance

We have been looking in detail at recent trends in housing refinance, by using a combination of the recently released ABS data and results from the DFA surveys. There is an interesting story to tell here. So today we explore the refinancing landscape. First the ABS data shows us that refinancing value has been increasing to a record $5.9bn in July 2014, and represents more than 30% of all owner occupied lending, and about 17% of all housing lending.

RefinanceAug2014We also see that the state distribution is centered on NSW and VIC.

RefinanceStateAug2014However, looking in percentage terms, there is only a small rise in NSW, and a fall in QLD.

RefinanceStatePCAug2014Turning to our surveys, about 17.5% of refinacing are to fixed loans, the rest variable, either principal and interest or interest only. A considerable proportion of refinance deals are via brokers, with a record 74% in September.

RefinanceViaBrokerAug2014Households with loans between $250k and 500k are likely to refinance, though those with larger loans are more likely to refinance their loan, compared with those with below $100k balances.

RefinanceValueBandsOct2014Turning to the loan type, the majority are refinancing to a principal and interest loans (P&I), though we note that those with larger balances are more likely to consider an interest only loan.

RefinanceLoanTypeAug2014Looking in more detail, we see that brokers are more likely to initiate a conversation with a household on refinancing if the loan is larger. Many are driven by the need to reset the term (this relates to the industry practice of having a nominal 30 year term, with five year reviews, plus fixed term loans maturing). We also see a concern to reduce monthly payments, especially in the loans between 250k and 500k, and to release cash in the case of larger loans, especially above $750k, where we assume the capital appreciation in the property is most significant.

RefinanceDriversAug2014In the survey detail, we found that some were releasing capital to assist in the purchase of an investment property, or to assist others to purchase a property. Refer to the recent post on the Bank of Mum and Dad. Most households who were concerned about rates have already locked into fixed products, though many still preferred the variable rate product. We also found that more than 50% of households considering a refinance were ahead of schedule on their nominal monthly repayments. Those in the range 250k – 500k were least likely to be ahead.

Overall then, refinancing is a significant element in the property owning household sector, and yet there has been little discussion of this facet of the market, compared with first time buyers and investors.

Foreign Property Buyers Are Market Significant – nab

The results from the National Australia Bank’s latest residential property survey shows that foreign buyers are flocking to buy Australian property, snapping up one out of every six new homes – and that number is set to get higher.

NABSUrveyForeign buyers were more prevalent in new housing markets in Q3. Foreign buyers accounted for 16.8% of total demand (about 1 in 6 of all buyers), and this share is tipped to rise further next year (17.3%). Foreign buyers were more active in all states, especially VIC where they accounted for an estimated 24.8% of demand (or 1 in 4 sales). In contrast, local investors were less active in Q3, with their share of national demand falling to 27% (32.5% in Q2). Local investors accounted for a smaller share of demand in all states.

Foreign buyers were slightly more active in established property markets in Q3, with their share of total national demand rising to 8.2% (7.2% in Q2). Foreign buyer demand for established property increased in all states except NSW. VIC led the way, with foreigners accounting for a record high 11.5% of established property demand.

NAB chief economist Alan Oster said first-home buyers were not competing with foreign investors for property, because foreign buyers opt for high-end apartments – “they’re not buying cheap stuff”. It’s local investors creating the most difficulty for first-timers, he said, spurred on by low interest rates, superannuation changes and a tax system that encourages property investment.

While there are restrictions on what properties foreign investors can buy, the Foreign Investment Review Board has been criticised for failing to enforce those rules and a parliamentary inquiry into foreign investment in residential real estate is due to deliver its recommendations in November.