Falling home loans flashes red alert for house price falls

Expectations for a deeper property market slump have been reinforced by surprising new figures.

The RBA has increased its key monetary policy rate 275 basis points since May.

A sharp fall in new home loans has reinforced expectations of a property market slump as the Reserve Bank’s aggressive interest rate hikes crimp home loan affordability.

While home loans peaked in January, an 8.2 per cent month-on-month drop in the total value of new loans for September came as a surprise to economists expecting a fall of around 3 per cent.

It came after the Reserve Bank opted for another 25 basis point increase in the cash rate to 2.85 per cent this week. The RBA slowed the pace of rate hikes last month as it gauges their impact, noting that the “full impact of the increase in interest rates is yet to be felt in mortgage payments.”

The RBA has increased its key monetary policy rate 275 basis points since May as it cracks down on inflation running well above its target, thanks to unprecedented stimulus during the pandemic.

The cumulative impact of the jump in mortgage rates is also flowing through to property prices.

The capital city average home price fell a further 1.2 per cent month-on-month in October.

House prices have fallen six months in a row and were down 6 per cent in that period.

It’s the sharpest pace of falls in monthly records going back to 1980, according to CoreLogic.

New owner-occupiers led the decline in home lending, with a very steep 9.3 per cent drop.

Investor loans fell 6 per cent after falling more than owner-occupier loans in recent months.

Both well below market expectations of falls of 2.5 per cent and 3 per cent respectively.

Housing finance approvals are 26.2 per cent below their peak, but still well above pre-Covid levels.

Investor activity has been relatively subdued over the current cycle.

While investor finance approvals are now 7.5 per cent below their 2017 peak, owner-occupier loans are still 16 per cent higher than in 2017 and previous peaks in 2017.

“Overall, while the fall in housing finance approvals for September shows that rate hikes were larger than expected, both the headline move and the details were broadly in line with the wider picture of a market correction that has further to run,” Westpac senior economist Matthew Hassan said.

He said recent updates on turnover and prices suggest nominal transaction activity stabilised somewhat in recent months, suggesting finance approvals may do the same.

That said, the continued rise in interest rates suggests there will be no let-up to the correction phase for markets and finance activity, he added.

Commonwealth Bank said that with the RBA tightening interest rates further in October and November, and another lift likely in December, housing market activity will cool further, helping reduce some of the inflationary pressures the RBA is trying to contain.

CBA senior economist Kristina Clifton said changes in home lending were a good leading indicator of dwelling prices about six months in advance.

“The weakness in new lending suggests further falls in dwelling prices ahead,” she said.

“We expect dwelling prices to fall by around 15 per cent from their April 22 peak.

“So far, prices are down around 6.5 per cent. Falling dwelling prices typically generate negative wealth effects, where households reduce their consumption in response to lower asset prices.

“Slower consumption should also help take some pressure off inflation.”

NAB economist, Taylor Nugent, noted that the fall in home loans was led by loans for detached homes, after three consecutive months of gains which “looked to be signalling tentative strength after having fallen sharply from their peak.”

Detached house approvals fell 7.8 per cent month-on-month, more than unwinding August’s 4.8 per cent rise. Overall detached house approvals were 32 per cent below their peak in March 2021, but remained around 2018 average levels, and were still 11 per cent above 2019 average levels.

“The data again looks more consistent with detached house approvals having plateaued through 2022 after falling back from their stimulus-induced peaks,” Mr Nugent said.

“That flow of new approvals remains at reasonably healthy levels despite sharp increases in construction costs and pulled forward demand over the past two years.”

Home building pipelines are “full”, with a record 104,000 under construction in the June quarter.

ANZ senior economist, Adelaide Timbrell said rate hikes are “hitting housing lending sharply.”

ANZ’s forecast that the RBA will lift the cash rate to a peak of 3.85 per cent next year “implies further reductions in both borrowing capacity and loan sizes are still to come,” she said.

Originally published as Falling home loans flashes red alert for house price falls