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.