- Australian new housing sales fell for a fifth consecutive month in May, and now sit at the lowest level in years.
- Like April, sales fell in every mainland state, led by steep declines in New South Wales and Victoria.
- Affordability constraints, weak household income growth, tighter lending standards and falling home prices, putting off some from purchasing, likely explain the continued weakness.
Australian new home sales just fell heavily across the country. Again.
According to Australia’s Housing Industry Association (HIA), housing sales slumped 4.4% in May in seasonally adjusted terms, leaving the decline over the past year at 14.1%.
As seen in the chart below, housing sales are now the weakest they’ve been since February 2013.
For a second consecutive month, the HIA said sales fell in each of Australia’s five mainland states, led by a steep drop in New South Wales, Australia’s most populous state.
It also happens to be home to the most expensive housing in Australia, especially the capital, Sydney.
Sales slumped by 6.8% in New South Wales, the third monthly decline in a row.
“Tightening credit conditions and house price reductions are the key factors precipitating the emerging downturn in both house sales and approval, themselves an indication of a downturn in actual bricks and mortar house building activity,” the HIA said.
“While population growth has remained strong, the pace of growth has slowed and this could emerge as a key risk of a stronger than expected downturn in new house building.”
Like New South Wales, sales volumes also fell heavily in Victoria, Australia’s second-most populous state.
In May, they fell by 4.6%, also the third decline in a row, reflecting a slowdown in sales in the state capital, Melbourne.
“The new home market in Melbourne has been exceptionally strong over a number of years and we are now seeing a very modest slow-down in activity,” the HIA said.
Sales in Victoria now sit at the lowest level in nearly a year despite booming population growth.
Across the remaining states, sales fell by 5.0% in Queensland, 0.2% in South Australia and 2.4% in Western Australia.
Another ugly result, and one that brings into question whether the recent strength in private sector housing approvals will translate to actual starts.
The HIA put the ongoing broad-based weakness down to tighter home loan restrictions, limiting the amount or ability for prospective buyers to obtain finance.
“Access to finance has become the barrier to ongoing growth in home sales,” said Tim Reardon, principal economist at the HIA.
“The availability of credit has tightened over the past 12 months with banks responding to the decline in house prices and the Banking Royal Commission by limiting lending to new home buyers.”
In March 2017, Australia’s banking regulator, APRA, introduced a cap on interest-only mortgage lending, limiting it to a maximum 30% of new housing debt.
On top of those changes, APRA wrote to Australian authorised deposit-taking institutions (ADIs) earlier this year telling them to “develop internal portfolio limits on the proportion of new lending at very high debt-to-income levels, and policy limits on maximum debt-to-income levels for individual borrowers”.
Limiting the amount of lending to highly-indebted borrowers, or those seeking a large loan compared to their income level, essentially.
The tightening of lending standards has resulted in a drop in home loan lending and housing credit growth, especially to investors.
According to data released separately from the Reserve Bank of Australia (RBA) today, housing credit — the outstanding balance of housing loans held by ADIs — grew by just 0.4% in seasonally adjusted terms in May, seeing the increase on a year earlier slow to 5.8%, the weakest level since February 2014.
Reflecting tighter restrictions on interest-only lending — previously favoured by a vast majority of investors — credit growth to investors came in flat, the weakest result on record.
That saw growth in investor housing finance over the year slow to 2%, continuing the deceleration over the prior 10 months. It too is growing at the slowest pace on record.
In contrast to investor credit, that extended to owner-occupiers remained firm at 0.6% for the month, although that still saw the annual pace of growth slow to 7.9% from 8% in April.
“Looking ahead, the pace of credit growth for both owner occupier and investor housing is likely to slow a bit more as lending standards tighten further,” said Kristina Clifton, senior economist at Commonwealth Bank.
The tightening in lending standards has not only contributed to the slowdown in new housing sales, but has also been a major factor behind falls in Australian home prices, especially in Sydney and Melbourne, those markets with the highest median values across Australia.
Along with the APRA intervention to help cool housing market conditions, the HIA said sales volumes may also have been impacted by a slowing in Australian population growth in 2017.
“Australia’s population growth has slowed over the past three quarters in response to tighter visa requirements that have constrained inward migration,” Reardon said,
According to the Australian Bureau of Statistics (ABS), Australia’s population grew by 388,000, or 1.6%, in 2017, a slight reduction on the level seen in 2016.
The modest slowdown was driven by a decline in net overseas migration (NOM) which grew by 240,040, down from a record increase of 243,800 in 2016.
While a slight reduction, population growth in New South Wales, Victoria and Queensland — those states where new home sales fell the most in May — still stood at 116,800, 143,000 and 81,500 respectively, accounting for the vast bulk of the national increase.
With growth levels like that, it suggests other factors such as affordability constraints, weak household income growth, tighter lending standards and falling home prices, putting off some from purchasing, have largely been responsible for the recent weakness in sales.