Mar/10

10

Demand for home loans drops…for now

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The number of new home loans has fallen for the fourth month in a row.

However, the continuing strength of employment and house prices indicates that this fall in demand will be short-lived.

Demand for new home loans dropped nearly 8% in January against the backdrop of rising interest rates and the end of the Federal Government’s more generous first home buyers grant.

In January, 51,056 loans were granted to owner-occupiers, a 7.9% seasonally-adjusted decline on December, according to Australian Bureau of Statistics data released earlier in March. It was the fourth consecutive monthly decline.

The President of the Real Estate Institute of Australia (REIA), Mr David Airey, said

“The impact of the three consecutive interest rate increases in the December quarter of last year and the phasing out of the First Home Owners Grant Boost are clear in these figures. The number of finance commitments to first home buyers is now less than half of what it was six months ago.”

An economist at financial markets research group 4Cast, Michael Turner, agrees the decline was due to first home buyers retreating from the market, as the temporary boost to the first home owner grant was wound back.

“It is not as though it was a massive change in policy – for purchases of established home it only dropped from $10,500 to $7,000.
That’s not huge, but it seems to have been enough, along with at least 0.75% of interest rate rises, to have taken the incentive away for a lot of first home buyers.”r

Buoyant property marketThe reason for the tightening of monetary policy is that the property and employment markets have bounced back so well. House prices rose by an average of around 10% in 2009 and continue to show strong gains. As the RBA commented in its March meeting:

“The market for established housing had been very buoyant, with auction clearance rates at high levels, notably in Melbourne. Data for housing prices suggested that nationwide prices had continued to grow at a rate of close to 1% per month in December and January. Building approvals in December and January were running at a relatively high level compared with the past year…”

Unemployment is also remarkably low, with the Australian Bureau of Statistics reporting a further reduction in February to 5.3%. This compares to nearly 10% in the USA, and is far less than was being predicted only a few months ago.

Together these figures point to a continuing strong demand for property.

Looking forward

The RBA will continue to move interest rates towards more �neutral� levels, meaning that it believes that the market stimulus given by extraordinarily low interest rates is no longer needed.

As the RBA�s March Board minutes state:


“On balance, members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels, and that it was timely to take another step in that direction.”


Many economists believe the RBA will put up the cash rate by at least another 0.25% to 0.50% by the end of 2010.

Conclusion

Increasing interest rates and the end of the first home buyer boost has had a temporary dampening effect on the number of home loans being taken out by borrowers.

The reason for this tightening of monetary policy is due to the buoyant Australian economy. Unemployment is much lower than other economies, and house prices rose around 10% in 2009 and continue to rise by 1% per month.

Therefore this slump in home loan borrowings is likely to be short-lived.

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