The housing finance data released by the ABS for the December quarter this week highlight some interesting trends in the Australian housing market. The ‘broad brush’ overview is that owner occupier loans are showing a small improvement due to increasing non-first home buyer activity, first home buyers are remaining on the sidelines and the value of investor finance has remained fairly flat.
What’s important to remember when interpreting these widely quoted figures is that the data includes loans being refinanced. Refinancing is usually utilized to either change financial institution, to release equity in the property, or to re-structure a mortgage holding. The refinancing data is important when interpreting consumer behaviour with relation to interest rates and banking preferences, however generally this component of the housing finance data should be stripped out when making an assessment of housing market conditions.
For example, the total number of owner occupier housing finance commitments has fallen by -2.8% year on year to December 2010. Diving a bit deeper, further analysis shows a 16.2% increase in owner occupier re-finances and a -9.5% decline in new owner occupier loan commitments. This result highlights that refinance volumes have grown markedly during the year whilst other owner occupier finance commitments have actually weakened.
The year on year result shows that the number of refinance commitments for established dwelling has increased significantly from last year (16.2%). As a result, once refinance commitments are removed from the total, the results are quite weak with volumes down -9.5% year on year. This result highlights that refinance volumes have grown markedly during the year whilst other owner occupier finance commitments have been quite flat.
As previously mention, refinancing is usually utilized to either change financial institution, to release equity in the property or to restructure a mortgage holding. I would anticipate that much of the refinancing being undertaken has been to utilize equity in one’s property or to restructure a mortgage holding given the fees and charges associated with moving financiers. Looking at those potentially utilizing equity, the total value of alteration commitments is down -4.7% over the year and the total value of investment housing finance commitments are -1.6% lower over the year. This result indicates that in the main, refinancing for equity purposes is largely not being undertaken to renovate the property, nor is it being utilized to purchase investment properties.
Perhaps people are diversifying their portfolio and investing in stocks or bonds. One other option may be that home owners are using the equity in their homes to pay down other forms of debt such as credit cards, car loans or personal loans.
The Australian National Accounts data released quarterly by the ABS reports on the net household savings ratio which is the ratio between net saving and net household disposable income. As at September 2010, the Australian household was typically recording a net saving ratio of 10.2%. Although the ratio is below it’s most recent peak (June 2009 at 11.6%) the current level of household savings is at some of the highest since 1987. Consumer conservatism isn’t just showing up in a greater propensity to save, retail trade figures are sluggish and many retailers are reporting that consumer spending is low, not to mention that housing finance commitments are lower than they were last year and indicative sales volumes suggest a significant decline in property transactions over the year.
Given this, are we seeing a greater level of consumer conservatism, as a result are some home owners both saving more of their income and utilizing their equity to pay down other debts, or are they using their equity for other forms of investment such as shares, managed funds or bonds?
Do you agree with the housing finance data? Have you re-drawn some equity from your property and if so what do you intend to do with the equity? Please let me know your thoughts.