- Housing indicators are weakening in Australia, from prices to clearance rates, credit growth and new home sales.
- ANZ Bank is watching Australia’s housing credit “impulse”, a measure on the change in the change of credit growth.
- It says the impulse provides a reliable lead on turning points in the annual change of house prices.
Housing indicators are weakening in Australia, from prices to clearance rates, credit growth and new home sales.
To ANZ Bank, those trends are likely to remain in place for sometime yet, driven by tighter home loan restrictions being rolled out by Australian lenders.
As such, it now believes prices will fall for longer than it previously forecast.
“In our view, the renewed weakness in house prices — after what appeared to be a period of stability — is due to a supply-side tightening in credit triggered by the atmospherics around mortgage lending by the banks,” says David Plank, Head of Australian Economics at ANZ.
“We think the best way to analyse the impact of the supply-side credit tightening on house prices is to consider what it means for the housing credit impulse.”
The credit “impulse” that Plank refers to measures the change in the change of credit growth. Essentially, the deviation in housing credit from average levels.
Pointing to the chart below, Plank says the credit impulse provides a reliable lead on turning points in the annual change of house prices.
He also suggests that it does a good job in terms of leading the level of house price growth.
Right now, Australia’s housing credit impulse is weakening, an outcome that, as ANZ suggests, fits with the recent decline in annual price measures.
Plank says that should credit growth slow by 0.1 percentage points for the next couple of months — the same rate of decline between the March and April credit figures — it will provide a sense of where the credit impulse is heading, at least in the near-term.
As indicated by the dotted line on the chart, such an outcome would point to even larger declines in an annualised basis.
The question now is whether the deviation from trend in housing credit growth will continue to widen — something that would normally signal even larger price declines ahead.
At this juncture, Plank says the answer remains uncertain.
“The key judgment we need to make is how far the decline in the credit impulse is likely to extend,” he says. “This will depend on the extent to which credit is restricted by the current tightening in supply.”
While Australia’s housing credit impulse is turning lower as tighter lending restrictions based on income and debt levels filter through the banking system, Plank says that’s unlikely to remain the case over the longer-term.
“[It is] important to note that by its very construction, it is difficult for the credit impulse to keep falling,” he says.
“Critically, a turn in the credit impulse does not require growth in credit to resume. Rather, when the rate of decline in credit growth slows the credit impulse will start to rise.
“In our view, this is why the impact of a supply-side tightening in credit, which does not involve a change in the price of credit, fades over time.”
If such a scenario does play out — something that would probably require no major increase in borrowing costs or additional lending restrictions — it points to the likelihood that price declines would also begin to moderate, at least based on historic relationships.