Mortgage finance falters

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A month ago some extra­or­di­nary head­lines appeared in the Fair­fax new­pa­pers. The Syd­ney Morn­ing Her­ald ran with: “House prices to plateau as buy­ers flee in droves”.

Alan Kohler wrote at the time in Busi­ness Spec­ta­tor that ‘flee’ was too strong a word for what was hap­pen­ing – hous­ing lend­ing was con­tin­u­ing to fall in both num­ber and val­ue terms, but investors were con­tin­u­ing to bor­row strong­ly and prop up the mar­ket. How­ev­er, he did sug­gest that a price plateau in hous­ing looked like­ly.

Now, with one more mon­th’s data to hand, what’s strange is how qui­et the major papers have gone on the gen­uine­ly alarm­ing falls in home lend­ing.

Bull­ish econ­o­mists may have hoped that the tem­po­rary drop off in first home buy­ers— cre­at­ed by the bring­ing for­ward of demand by the First Home Own­ers’ Boost in 2009—would quick­ly pass, and that num­bers and val­ues of loans would begin to trend up again. This has not been the case – loan com­mit­ments for own­er occu­piers fell 3.4 per cent in March in sea­son­al­ly adjust­ed terms, or 4.1 per cent in trend terms.

This led JP Mor­gan to observe in a note: “…the pro­tract­ed nature of the pay­back is some­thing of a con­cern, espe­cial­ly giv­en that there are still at least two more inter­est rate hikes yet to flow through to the data, those deliv­ered in April and May this year.”

But that ‘con­cern’ did not both­er most com­men­ta­tors, who most­ly seem to believe that the investors who are cur­rent­ly increas­ing their bor­row­ing (it was up 3.0 per cent in March in sea­son­al­ly adjust­ed terms or 1.1 per cent in trend terms) can pick up the mar­ket slack as younger buy­ers and first home buy­ers decide they can’t afford to enter the mar­ket.

Let’s think about that for a minute. Young Aus­tralians, the ‘bot­tom rung’ on the hous­ing lad­der, are dis­ap­pear­ing from the hous­ing mar­ket in droves. Mean­while investors who are able to do so are gear­ing up and keep­ing demand in the mar­ket strong enough to keep clear­ance rates and prices up.

But why are they doing it? Are they invest­ing in prop­er­ty for the rental yields the can earn? Absolute­ly not. Why would an investor buy a prop­er­ty yield­ing 3 or 4 per cent at a time when two-year bank deposit rates are as high as 8 per cent? The only log­i­cal rea­son to ignore secure high yield­ing returns and jump into hous­ing at this time is to cap­ture con­tin­ued strong cap­i­tal growth.

Those investors may be very dis­ap­point­ed. As JP Mor­gan not­ed, we haven’t even seen the effect on home lending/buying from the April and May rate hikes. One won­ders how any­body can expect the cur­rent trend in home lend­ing to turn around as the price of bor­row­ing con­tin­ues to increase.

So the trend that is already evi­dent is almost cer­tain to get worse – see charts below for an indi­ca­tion of how unprece­dent­ed the cur­rent falls in home lend­ing are to any­one oth­er than investors seek­ing cap­i­tal gain. Both charts clear­ly show the huge drop in bor­row­ing caused by the GFC, then a huge resur­gence in bor­row­ing caused by what I pre­fer to call the First Home Ven­dors Boost, then a fright­en­ing drop off in own­er-occu­pi­er bor­row­ing since mid-2009.

New investors enter­ing the hous­ing mar­ket are join­ing a clas­sic Ponzi Scheme endgame. Own­er occu­piers are desert­ing the mar­ket, and yet investors still believe they can make cap­i­tal gains by sell­ing the same assets to oth­er investors with the same views. Let’s see how long they can keep that game up.

The next two months’ data on home lend­ing should be enough to con­firm which way things are going. My guess is the Fair­fax head­lines from a month ago will be seen, in hind­sight, as unusu­al­ly pre­scient.