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Australian home loan demand is cooling

Photo by Spencer Platt/Getty Images

Australian housing finance data missed expectations in January, pointing to the likelihood that recent strength in house prices may ebb in the months ahead.

According to the ABS, the number of owner-occupier loans fell by 3.9% after seasonal adjustments, mirroring declines of 2.8% and 3.0% for construction and new home purchases.

Like the number of home loans written, the value of new lending also slumped, falling to the lowest level seen November 2014 excluding refinancing. At 4.1%, the drop from one year earlier was the steepest seen since October 2011.

The value of owner-occupier lending slid 4.3% to $20.543 billion, outpacing a smaller drop of 1.6% to $11.356 billion for investors.

Excluding refinancing of existing loans, new owner-occupier lending fell by $756 million to $13.3 billion, or 5.4%. From a year earlier it increased by 7.3%, near half the pace reported in the year to December.

Reflective of recent measures introduced by Australia’s banking regulator, APRA, to cool lending to housing investors, the value of lending to this component slid 14.8% from 12 months earlier.

The value of owner-occupier refinancing fell by $173.7 million to $7.245 billion, down 2.3% on December.

Even with recent distortions in the data due to loan reclassification by lenders – shown in the chart below – the value of lending to both owner-occupiers and investors appears to be cooling, albeit from lofty levels.

According to George Tharenou, Scott Haslem and Jim Xu, UBS Australia’s economics team, the slide in home loan lending “points to further moderation in house price and credit growth” in the months ahead.

“This softer data bears close watching to see if it persists in coming months, amid some renewed concerns in markets over domestic lending standards (which we argue have actually tightened), as well as a possible slowdown of foreign investment into Australian housing, which is increasingly a key support,” wrote the trio.

“Overall we still expect a housing moderation rather than a downturn.”

They point to the chart below showing annual rates of home loan lending, advanced five months, against movements in dwelling prices, to justify their call.

Given the recent drop in home loan lending and the past relationship between the variables, it suggests that house price growth may moderate, rather than fall, should the relationship remain intact.

The recent rebound in auction clearance rates, along with modest price increases to start the year, further bolsters this view.

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