Another fall in housing loans suggests affordability concerns could hurt house price growth

Data showing Australian house lending has fallen to a nine-year low is more proof that housing affordability has deteriorated sharply, industry experts say.

The Australian Bureau of Statistics figures reveal finance for owner-occupied housing dropped by 3.4% in March to a seasonally-adjusted 48,260, the lowest point since April 2001. It was the sixth consecutive monthly decline in housing finance.

The amount of funding being provided for housing loans has fallen from $15.38 billion in October 2009 to $12.36 billion in March.

Finance for construction of new houses dropped by 7.3% to $5.8 billion, while finance for the purchase of new homes dropped by 3.2% to $2.09 billion. Finance for purchases of established homes also fell by 2.9% to $40.31 billion.

Experts say rising interest rates and strong price growth has caused would-be buyers to back away from the market. Figures from Australian Property Monitors, RP Data, Rismark and the ABS show prices have continued to grow by as much as 20% over the past 12 months.

SQM Research founder Louis Christopher says these figures all indicate the buyers are backing away from an overheated market.

“Falling housing finance approvals are a function of deteriorating affordability, but also, of course, a function of the repeal of the first home owners grant. That grant merely pushed buyer activity forward, and there was always going to be a hole in its wake.”

Christopher dismisses the notion that investors have picked up the slack, noting that the actual number of investors hasn’t changed, despite figures showing they are taking up a higher percentage of finance.

“You will see some people claiming that investors are picking up the slack and driving the market, but in absolute numbers investors haven’t actually increased. Of course their ratio will increase when first home owners leave – it’s simple mathematics.”

The ABS data shows the number of first home buyer commitments as a percentage of total owner occupied commitments fell from 18.1% in February to just 16.1% in March. This confirms other predictions made by analysts, particularly Martin North from Fujitsu, that first home buyers will back away from the market as interest rates continue to rise.

North has said more first-home owners who bought within the last 18 months will head into mortgage stress as rates rise, with many already devoting over 30% of their take-home pay to repayments. Potential buyers will back away from the market as their finances are thinned out, he has said.

APM economist Matthew Bell agrees that falling finance data indicates an affordability issue, but also says price growth will continue to moderate over this year as a result.

“I do expect price growth to actually fall during the next two quarters, as opposed to seeing actual price decreases. I think we are seeing pretty strong auction results and clearance results, and so price growth will moderate rather than fall.”

Real Estate Institute of Australia president David Airey says the figures show a definite drop in demand.

“This demand has dropped due to loan-to-value ratio drops, which has reduced the amount of opportunity for approval… and we are finding there are a lot more finance knock-backs than there are before. Add to that, six interest rate rises and those interest rate factors have really had a telling effect on the market.”

Meanwhile, property buyers in New South Wales are set to be hit with another tax as the Government attempts to shore up its bottom line.

The new tax, which is expected to be introduced in July, will add about $200-$1,000 to the cost of a new home. It will apply to transfer fees for properties worth over $500,000 – however, data from APM shows the median house price for the city is $595,745.

The new tax will be added to the existing tax on title transfers, with 0.2% charged on properties between $500,000 to $1 million and at 0.25% above $1 million.

Premier Kristina Keneally has said the new tax will help stop property fraud and will only apply to about 30% of transactions, but critics have said the Government has taken the industry by surprise and used the Federal Budget to slip in the new charged unnoticed.