The Australian Bureau of Statistics (ABS) released housing finance data for the month of September this week and in this week’s blog post we are going to dissect what is happening with average loan amount being committed to by borrowers.
On an annual basis, the average loan size fell by -0.6% over the 12 months to September 2011. This represented the largest annual fall in the average home loan size since February 2001 (-3.8%). The average first home buyer loan size increased by just 0.2% over the year and non-first home buyer average loan sizes fell by -0.8%. The fall in the average loan size for non-first home buyers was the first annual fall since February 2001 (-2.3%).
There is a fairly strong correlation between the decline in average loan sizes and the fall in capital city home values. As mentioned the average loan size is down -0.6% over the year and over the same period, capital city property values have fallen by -3.4%. The graph below tracks annualised growth of both measures over a long period and it shows that there is a correlation, albeit that the slowdown in growth of the average loan size tends to precede the decline in property values. The link between the two measures is obvious, if property values are lower, theoretically the amount that purchasers have to borrow to purchase should also be lower.
Across most states we are seeing that the average home loan size is also falling in fact, only Victoria, South Australia and Tasmania have recorded an increase in the average loan size over the year. It is important to remember that home values have fallen across each capital city over the past year, ranging from a -1.2% fall in Sydney to a -9.1% fall in Hobart.
When breaking the data out by first home buyer and non-first home buyer loans it seems that although first home buyers are showing a below average level of activity, in most states they have been prepared to borrow a greater amount to enter the housing market. The average first home buyer loan size has increased in each state except for New South Wales (-1.8%) and Queensland (-3.6%). Non-first home buyers are proving to be less inclined to borrow larger sums than they were a year ago with the average loan size only increasing in Victoria (3.2%), South Australia (2.2%) and Tasmania (1.4%) over the year.
Overall, the fall in the average loan size across the country reflects the overall mindset of consumers, one of caution and debt avoidance. Retail trade is slow, property values have fallen, property transactions are 13% below average, consumers are showing low levels of confidence and households are saving and paying down debt at levels not seen since the mid 1980’s. It will be interesting to see over the coming months and year what impact the initial interest rate cut will have on average loan sizes. If further rate cuts do occur we may see the average loan size grow once more due to the housing affordability improvements achieved through a lower interest rate environment. This would of course be counterbalanced by the weak consumer mindset as previously highlighted