The link between housing debt and home prices in Australia, in one chart


Where housing debt moves, home prices tend to follow.

The chart below from the Commonwealth Bank demonstrates the relationship between the two.


The percentage change in housing finance is presented as a three-month moving average to help smooth out volatility in seasonally-adjusted data, providing a better indication of the broader trend.

With the value of home loan lending continuing to slide in September, falling to the lowest level in over four years due to weakness in both investor and owner-occupier lending, it helps explain why Australian home prices have fallen for 13 consecutive months.

Based on current lending trends, and the leading relationship it has to valuations, Gareth Aird, Senior Economist at the Commonwealth Bank, says the streak of monthly price declines will extend for some time yet.

“Trends in the flow of credit point to further dwelling price deflation,” he said following the release of the September housing finance data.

And while the RBA appears relaxed about the current correction underway in prices, Aird says that may not remain the case if continued weakness in the housing market spills over into other areas of the economy.

“To date, the RBA has remained relaxed about the fall in dwelling prices because the broader economy has performed relatively well,” he says.

“As long as the downturn in the housing market remains divorced from the broader economy the RBA will continue to signal that rates are more likely to go up than down.

“But the risk of a negative wealth effect impacting consumer spending is rising the longer the downturn in dwelling prices persists.”