Home Loans a Mirror of The Housing Market
Predictions about the housing market are one thing but, the trouble is predictions will always vary and be tinged with at least some degree of speculation.
Where else can we look for indications about how the housing market functions?
There are the weekly auction results, and these do pick up trends and show how much demand there is in the market. However, auction results don't cover the entire market, and individuals drive them. Home loan figures, the key trends, show a very detailed insight into the market, and the figures have a long and useful history.
Australia's housing loan market is estimated to be valued at about $1.6 trillion, that's a big and impressive amount of money, even if it's a somewhat difficult figure to grasp. However, what we get from looking at this set of numbers is a substantial foundation of knowledge and some interesting figures. The trends revealed can help put the home loan market and the changes taking place into a wider and useful perspective.
Commodity, Investment or Home
Let's start with a broad overview. The ABS estimate that 31% of all Australian homeowners have no mortgage at all, they are loan free. Although, in 1991 the figure was much higher at 40% and so we can see that outright home ownership has been in a period of long-term decline for almost 30 years.
There's been a lot of debate which can sound a little nostalgic centred around the notion that ‘homes' are no longer that; they have somehow morphed into a commodity that's investment driven.
While it's true, we all aim to own, and live in our homes, but has our attitude shifted or are we just failing to adjust to the reality of increased urban society?
The housing market is huge, some recent APRA figures (based on ADI institutions) demonstrate this. The value of domestic housing loans in the December quarter 2017 stood at $1,578 billion up 6.3% from $1,485 12 months earlier. The number of loans over the same time increased from 5,723,700 to 5,851,000 again up by 2.2%.
The average loan increased by 4% from $256,100 to $266,500, while loan approvals fell slightly by 0.7% from $101 billion to $100.3 billion.
This is one key and significant area that reflects some general trends among existing homeowners with mortgages. Since 2014 refinancing took off in a trend that was marked with strong demand over 2 years. This period directly aligns with the low interest rate environment over the same period. Also over this time frame, RBA cash rates moved down from 2.5% to 1.5% where it remains today, although just 12 months earlier, in early 2013 the RBA cash rate was much high at 3.0%.
The demand for refinancing according to the ABS peaked in January 2016 and from then until the March quarter 2017 demand has been on a downward trend. However, over the last 12 months, there's been a slight but steady lift in refinancing.
This may well indicate that borrowers think rates will soon increase and the trends could also be a result of buyers moving from interest only loans to new loans. With prices under pressure, interest only loans are less attractive and are being actively discouraged.
A sudden increase in the demand to refinance, following a period of falling demand would appear to show a reversal of sentiment. That's important because it involves already established homeowners and if this group exhibits caution then it's a trend worth considering as a shift in sentiment among would be buyers and might well be amplified by their concerns over financial security.
Higher Prices More Debt
Housing tenure in Australia currently sees 31% of people living in homes with no mortgagee, 34.5% have a mortgage and 30.9% rent. The last two groups can reasonably be assumed to be interest rate sensitive and even more so when interest only loans are concerned.
These figures show us that having a mortgage is now the most common form of ownership for households. For people aged between 35 and 54 years, there's also a deeper trend to consider that in part reflects the higher cost of housing. Among this age group (35-54 years), ownership with a mortgage attached increased by 15% over the last two decades, from 41% to 56%, that's a big jump. It would be directly related to higher house prices and bigger loan balances.
At the same time, the rate of outright ownership among this same group in 2015-16 was just 12% and that's just one-third the figure in 1995-96 which was 36%, again a big drop showing the impact of higher prices and bigger loans.
There's a similar trend among older households, those aged 55 and over who were still paying off a mortgage has tripled between 1995-96 and 2015-16 up from a modest 7% to 21%.
More debt among older homeowners also has long term ramifications for retirement planning. Older households are spending much more on the cost of housing. The figures over two decades show the trend, for people aged between 55 and 64 those with a mortgage increasing from 8% with mortgages to 14%. While people aged 65 and over and still with a mortgage increased from 5% to 9%, possibly pushing retirement further into the future.
It's still early to tell if recent changes to superannuation rules will make cashing-out the family home and paying off any debt to downsize any more appealing for this group.
Low Rates Drive Demand
It's easy to understand why more people of all ages have bigger loans for longer. On average, capital city home prices jumped 35% between the 2011 and 2016 census, in Sydney the figure was much higher at 60%. Still, low interest rates do act to drive more demand and higher prices.
However, there's a need to be sensitive to how far this trend can reach. Low interest rates look attractive but with higher prices, buyers still need to be able to support their repayments.
For the wider market, there may be a tipping point beyond which even historically low rates will no longer drive more demand, and affordability will steeply decline and as we've already seen, people will have mortgages for longer.
A common yardstick is that households should not be spending more than 30% of their income on mortgage repayments or rent.
The last census shows that 22% of Sydney households are in such a situation, and with 33% of Sydney households having a mortgage, that's a big number of people.
Nationally the figure is much lower at 7.2% of households paying more than 30% of their income on mortgages. Low interest rates have helped drive this trend. Interest rates declined a lot between the census, falling from 4.75% to 1.5% now.
Fixed Rate or Variable
This is an area that can create confusion and perhaps the best starting point is the fact that most mortgages in Australia run for 20-25 years. Over this time the applicable interest rate will and does change, moving up and down.
This is different and not comparable to the 30-year term for a mortgage in the USA where the interest rate is fixed for the entire term of the loan.
While figures do vary, most Australians with a home loan are happy to have a variable interest rate setting on their home loan, so the interest rate can move at any time.
Most borrowers have variable rate loans, and currently, only 1 in 6 fix their loans. It appears that overwhelmingly people are willing to take a gamble with their interest rate being variable. Or is it that much of a gamble as we have been in a low interest rate setting now for many years?
The latest Australian Bureau of Statistics figures reveals that in November only 15.8% of owner occupiers chose to lock in their interest rate. This figure has fallen from 19% in August 2017. Interest rates remain competitive but we should remain alert to any change in this area as a shift to more fixed term loans would again see a shift in sentiment.
The Reserve Bank of Australia recently kept the cash rate on hold at 1.5%. There is little direct evidence that rates will increase anytime soon. However, rates are not expected to fall any further and if they do increase rapidly the impact could be financially devastating for many people with variable rate home loans.
Even with such predictions, it appears people are not looking to lock in current low rates for what is commonly a term of 1-5 years.
This is not always the case, as was seen back in late 2016 when, after several of the banks moved to increase their fix term rates, there was a monthly jump of 2%, in demand for fixed term loans.
If this is ‘soft-spot' with home buyers, then there is a strong case to lock into a fixed rate mortgage now while home loan rates are still sitting below 4%. So, we should ‘watch this space'.
Predictions aside, I suggest it's well worth keeping an eye on the key financial trends associated with home loans, as this may well help pickup shifts in buyer and market sentiment.
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