Housing finance lifts, but rules suggest a fall is around the corner

Australians are hammering the housing credit card right now, borrowing at very high levels, supported by the Government’s stimulus measures. However, it isn’t all rosy news, with banks increasing their provisions for bad loans, and the first increase in defaults expected to be just around the corner.

The first chart shows the value of loan approvals has lifted very sharply over the last four months, recovering most of the ground lost towards the end of 2019 and through the early days of the pandemic. In August, total loans were valued at AUD21.288 billion, up a very strong 19.3% on August 2019.

So, loan values were up in August, compared to a year earlier, but the chart shows that they had been tracking up before the recession hit. That makes the annualised data all the more relevant.

Over the year-ended August, the total value of loans was up 9.6% on the prior year, coming in at AUD226.7 billion. Loans to investors were down 1.9% to AUD59.8 billion over the year, while loans to first home buyers lifted a whopping 29.6% to hit AUD48.7 billion. That means over the year, first home buyers grew their share of loans from 18.2% to 21.5%.

There is a limit to just how many people can be first home buyers, what with only being able to do it once in your life for example. On that basis, it is not a complete surprise to see that after an initial stimulus boost, first home buyers have been out-gunned by those owner-occupiers who were back in the market.

Whatever the reasons, as we can see below, whether it was bargain buys, tree changes, forced sales or just the general run of transactions, established owners stepped up the last three months. That did not dent the involvement of first home buyers – they are competing in different markets in most cases – but the total share of loan values (the red line) dipped pretty quickly for first home buyers.


If we look closely at the investor loan details – the red line below – we can see that the value of new loans to investors has not been lower as a proportion of the total in the fifteen years displayed. At 23.5% of the total over the year-ended August, the proportion of loans to investors is plunging, and at a rate where some time in 2021, it is possible that loans to first home buyers could represent a larger share of the total market.

If that arose, it could bookmark a moment, but also record a significant change in the local housing market, away from accommodation speculation and towards home making (to borrow an idea).


That could not come too soon for regulators, and especially for banks that are already concerned about the end of some forms of recession-focussed welfare payments in March 2021. At the same time, those who have been on deferred payments will have to recommence making payments. About half did that in October, according to the ANZ Bank, as reported by Gareth Hutchens on ABC News online.

Hardship continues throughout the sector for many households, and it is conceivable that many are putting off their formal default for as long as they can.

The banks, meantime, are ensuring they make provision for the future, no matter how uncertain.

That is why the ANZ Bank has set aside a reported AUD2.740 billion for pandemic related losses from bad debts in 2019-20. The ANZ is not alone and there is no doubt that they and the other banks are being prudent and ensuring they have more capacity than they could require.

All indicate they are being cautious, rather than predicting a crash. That is prudent and a good thing. But it is also telling.

What it means is that the fundamentals of the economy and the housing market do not support the levels of existing borrowing in the market. Whether it supports the level of new borrowing we are seeing right now is also a question we might wait for a while, before getting answered.

Just like the banks, it is time for households to run the risk-return numbers and check their liquidity and capacity to pay. It’s the prudent thing to do.