Are improved conditions on the horizon?

Based on the latest housing finance data from the Australian Bureau of Statistics (ABS), the number of home loans being committed to across Australia reached a peak in September 2009 when there were 48,244 finance commitments registered over the month (seasonally adjusted and with refinanced loans removed).

A month later, the RBA embarked on their interest rate tightening cycle with the cash rate rising 25 basis points in October 2009 then a further six rate rises with the most recent in November last year. September 2009 was also the final month in which the boost to the First Home Owner’s Grant was available in full.

As interest rates started rising, new home loan volumes started falling quite swiftly. Between September 2009 and when the volume of finance commitments bottomed in June 2010, the number of loans being committed to fell by 32%.

More recently the ABS figures are showing a turnaround in the housing finance volumes. Over the second half of 2010 the number of home loans (with refinances removed) has increased by 7.9%. That’s a fairly positive indication that housing market transactions are likely to show an uptick over the coming months, albeit from a low base.

Despite the recent improvement, the number of housing finance commitments (not counting refinances) are 9% lower than at the same time last year and 13% lower than the five year average. With that in mind, any improvements in the number of home loans being committed to should be a welcome change.

The number of home loans being refinanced has shown an even sharper upwards trend. The volume of home loan refinances remains below the long term trend, however over the second half of 2010 home loan refinancing increased by 21%. The trend towards more home loans being refinanced should come as no surprise given the increased level of competition within the banking sector as well as higher interest rates prompting consumers to shop around more. If the proposal to ban exit fees from new home loans goes ahead (proposed launch for this Government initiative is July 1 this year) it is likely the trend towards more home loans being refinanced will increase much further.

Looking at the housing finance data a bit closer (once again, excluding refinanced loans) it is clear the vast majority of new loans are being issued for the purchase of established housing as opposed to construction of a new home or purchase of a new home. Loans for established homes currently comprise 87% of all new housing finance commitments, highlighting the challenge that developers of new housing stock face when delivering new stock to the market.

Another interesting aspect of the data is to examine the number of loans across the different types of lenders. The banking sector has historically held a dominant market share when it comes to housing finance. Currently banks attract about 85% of all housing finance commitments, however back in the early 1980’s the market share was significantly lower. In 1980 the non-bank sector actually attracted about half of the new housing finance commitments being committed to in the market. This was at a time when interest rates rose from 9% all the way up to 17% over a decade of rate rises.

More recently there has been a renewed trend towards housing loans originating within the non-bank sector, which includes lenders such as credit unions, cooperatives, building societies and wholesale lenders. The trend has been evident since the GFC started to wind down in the beginning of 2009; which is also when the housing market embarked on a very strong growth phase.

As the home loan market becomes increasingly competitive it is likely we will see a continuation in this trend. In response, expect the banking sector to step up their initiatives of releasing more innovative and attractive home loan packages aimed at maintaining market share. The increased level of competition is certainly good news for consumers who will benefit from the improved mortgage market conditions.

Tim Lawless is the Director of Property Research at RP Data.