Australia March home loans skid to nine-year low

SYDNEY: Australian demand for loans to buy houses sank to nine-year lows in March, providing further evidence that rising interest rates and a roll back in government cash handouts were hurting the mood of home buyers.

The slackening demand adds to the case for the Reserve Bank of Australia (RBA) to refrain from tightening policy for a while, having already lifted rates in six of its last seven policy meetings.

"The odds are that the RBA stays on the sidelines for a couple of months," said Su-Lin Ong, an analyst at RBC Capital.

"The combination of higher mortgage rates, a paring back of the first home owners grant at the start of this year, and further strength in house prices in the first quarter is clearly having a marked impact upon the appetite for borrowing."

The number of home loans taken out in March fell 3.4% to 48,620, seasonally adjusted, the lowest since March 2001.

Notably, demand for loans to build new homes also dropped a hefty 7.3%, the biggest fall in nearly eight years, suggesting construction activity could cool in 2011 after booming this year. If indeed fewer homes are to be built next year, property prices may climb even higher, an outcome that could unsettle the RBA. For as it is, Australian home prices are among the least affordable in the world due to a chronic shortage in housing.

Analysts say demand for home loans usually flag the growth in approvals for constructing new homes by three to six months.

"The RBA will not want to see a marked slowing in construction given the already established shortfall. This would simply put further pressure on house prices," Ong said.

The market was steady on the data, with the Australian dollar little changed at US$0.8939. Interbank futures showed investors were only fully priced for rates to rise to 4.75% by November, from 4.50% now.

Wednesday's (May 12) data showed investment demand was the only resilient part of the market for home loans, with a 3% rise in March after seasonal adjustments. That boded well for the rental market as it suggested more houses were available.

Yet, Julene Lee, an economist at Westpac, said it is crucial to differentiate whether investors were buying existing housing stock or if they were looking to invest in new homes.

"Certainly there is the need for further additions to the housing stock given pent-up demand and strong population growth," Lee said.

The RBA has warned repeatedly that a shortage in housing may push up home prices. Prices have already recovered to record highs by most measures, even as the rest of the world is only starting to emerge from the financial crisis.

A private report showed Australian house prices grew a sizzling 16.2% in the first quarter, their fastest pace in six years.

The run-up in home prices was one reason the RBA has lifted rates by an aggressive 150 basis points since October to cool property demand.

But it is also well aware that higher borrowing costs are a double-edged sword since they crimp the construction of new homes, which is just what the market needs.

"Housing supply will continue to slow into 2010," said David Cannington, an economist at ANZ.

"The shortage of housing in the Australian market will provide the fundamental economic forces to keep house prices growing in 2010, although not at the growth levels seen in 2009." -- Reuters