New home loans plummet as rates rise, house prices fall

11 views 2022-09-07 14:17:56

New home loans have fallen at their second-fastest rate in the past two decades, dropping 8.5 per cent in July, as rising rates and falling house prices put more buyers on the sidelines.

That drop in lending was sharper than most analysts expected – market consensus was for a 3.5 per cent decline month-on-month – and the largest on record, apart from the sudden decline in lending in May 2020, in response to the initial outbreak of COVID-19.

National home loan commitments, excluding refinancing, fell by $2.62 billion to $28.35 billion in seasonally adjusted terms in July, according to the Australian Bureau of Statistics.

Buyers were in retreat across the board. New loans to owner-occupiers were down 7 per cent while investor demand fell 11.2 per cent over the month.

“The current correction in property prices is easing affordability pressure but is being more than offset by rising borrowing costs. In response, the number of first-home buyer loans declined a sizeable 10.7 per cent, falling below the pre-pandemic level,” said Maree Kilroy, senior economist for BIS Oxford Economics.

“The impacts of increases to the cash rate by the Reserve Bank are now firmly showing through in the lending indicators data. With the cash rate expected to reach at least 2.6 per cent by the end of the year, demand for new and existing housing will continue contracting to mid-2023.”

The RBA has pushed the official cash rate to 1.85 per cent after a series of hikes beginning in May. Lenders large and small have followed suit, lifting their mortgage costs. The lowest variable mortgage rate is at 3.24 per cent, according to RateCity.

The number of new loan commitments to first home buyers –  who are arguably most sensitive to rate rises – has fallen 35.9 per cent compared to a year ago, according to the ABS. That decline has been sharpest in Queensland, where loans fell 18.8 per cent over July.

Just as rising mortgage rates squeezed some buyers out, rapidly falling house prices have made other would-be home purchasers warier. House prices in Sydney fell 2.3 per cent through August and are down 7.4 per cent from their peak, according to Corelogic figures released on Thursday. The housing correction has spread to every capital, bar Darwin.

AMP’s chief economist Shane Oliver expects house prices to fall 15 per cent to 20 per cent top to bottom fall by the second half of next year, followed by a gradual recovery.

“There are three reasons why this home price downturn will likely be deeper and the recovery slower than in past cycles: higher home price to income levels; higher debt levels; and an end to the long-term decline in interest rates,” Dr Oliver wrote in a note on Thursday.

Other analysts, including JP Morgan’s Jack P Stinson, noted the close link between investor lending and house prices.

“Given recent declines in dwelling prices, we expect the investor loan declines to be more significant than in owner-occupier, near-term,” he wrote in a briefing.

This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/new-home-loans-plummet-as-rates-rise-house-prices-fall-20220901-p5bels

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