Daily Commentary BY THE CURVE TEAM –

Housing Finance Deteriorating

14th of May, 2018

Despite the rosy outlook from the RBA and Australian Treasury, one of Australia’s growth engines looks under threat. Headwinds for housing finance in Australia are starting to take their toll and it could spell trouble for the broader economy.

The headwinds of repeated macro-prudential measures from the banking regulator, coupled with the fallout from the Royal Commission are starting to have an increasing impact on home financing activity. Up until recently, the pull back in investor activity was largely offset by a pick up in owner occupiers but now both are in retreat.

The latest data showed large falls across the board in housing finance approvals for March. By loan value, owner occupier finance fell by 1.9% from a month earlier while investor financing was down 9%.

The problem for Australia’s economy is that when monthly housing finance approvals go, so do house prices. After surging higher in the past few years, the housing market is in need of a period of consolidation. The risk is that the current slippage in house prices become more sinister, which in turn would impact the broader economy.

The private house price measures show prices, first in Sydney and now Melbourne have already been slipping for a number of months. However the ABS 8 capital city average has yet to show a similar decline. If the relationship between housing finance and house prices holds, prices could fall on a broader basis over the months ahead.

Rather than calling a large fall in prices, my point is to highlight the risk that falling prices has on the outlook for the economy. While the housing market is a large engine of growth for the economy, any deterioration in its health will have a more profound effect on an even bigger driver of house prices.

An orderly consolidation of prices or even a moderate steady decline should only have a minimal impact. However if prices continue to fall, consumption will in turn come under pressure. One step further and a protracted downturn would result in job losses, potentially kicking off a negative feedback loop.

The RBA doesn’t see the risk to the housing market at present as high and still holds an optimistic outlook for the economy. If housing finances continue to deteriorate, the RBA’s outlook would likely need to be revised.

David Flanagan

Director - Interest Rate Markets