Australia home loans dive, belie strength elsewhere

SYDNEY: Australian home loans fell the most in nearly eight years in January, hit by the scaling back of government grants to buyers and higher mortgage rates, suggesting past increases in interest rates were starting to bite, according to a Reuters report on March 10.

The 7.9% drop in mortgage commitments in January came as a complete surprise to analysts who had forecast a 2% rise and broke a string of upbeat economic news, briefly knocking the Australian dollar lower.

It also contrasted markedly with a survey of consumers for March that showed confidence remained at very high levels even after the Reserve Bank of Australia (RBA) last week lifted its cash rate for the fourth time in five meetings.

Indeed, the scale of the fall in home loans sat ill with what the banks themselves had experienced, and they hold around 90% of the mortgage market. The top four banks had forecast a rise of 3% in housing finance.

"This is a very strange outcome," said Michael Workman, a senior economist at Commonwealth Bank. "It goes against what we and the other major banks had seen in our own numbers and against other indicators like housing credit."

It would also have come as a surprise to the central bank, which has been resolutely upbeat on the domestic economy.

Earlier on March 10, central bank assistant Governor Philip Lowe predicted the economy would grow at, or above, average for the next couple of years and so support a strong labour market.

His concerns about housing were that the country was not building enough new homes to meet the demands of a rapidly growing population, thus pushing prices higher.

Home prices have been rising steadily for months and one closely watched measure hit record highs in January.

Lowe saw the main challenge ahead as being how to manage a coming boom in the resource and construction sectors without generating inflation.

The Australian dollar took a knock after the mortgage figures but bounced back to trade higher on the day on the view house prices would stay firm as housing supply struggles to keep up with demand from a fast-growing population.

After raising rates last week to 4%, the RBA made it clear that further moves would be needed to keep inflation restrained.

The market continues to price in around a one-in-three chance of a rise to 4.25% in April and has fully priced in such a move by June.

There was little sign as yet that higher rates had dented household sentiment much. A survey of 1,200 consumers by Westpac showed its index of confidence actually edged up 0.2% this month even after the latest increase in interest rates.

That left it 37% up on March last year and well above historic averages.

Key was the astounding performance of the labour market, which generated almost 200,000 new jobs in the five months to January and drove the unemployment rate down to 5.3%.

The February employment report is due on March 11 and expectations are for another healthy rise of 15,000.

Yet, Westpac's chief economist Bill Evans sounded a note on caution on consumers. He noted that mortgage rates had risen by more than the cash rate to stand at 6.9%, and history suggested that 7% was a major threshold for consumers.

Households on average were also more indebted these days than in the past, making them more sensitive to loan costs. "As we saw in the last cycle, once the variable mortgage rate reached 7.25%, households' responses to rate hikes became much sharper," said Evans.

"How consumer sentiment reacts in the months ahead will be a critical guide to whether policy tightening has passed this important threshold." -- Reuters