2005 wrap: House prices down, loans up

Despite falling or flat house prices around Australia – borrowing for housing continues to bubble along nicely – no doubt as prospective buyers re-enter the market after seeing some value return over the past year or so. The figures on first home-buyers certainly bear this out as they slowly claw their way back into the home loan market and increase their share of borrowing from the low-point experienced in late 2003.

The latest housing finance statistics released – those for October 2005 – show the number of housing finance commitments up by 1.1 per cent in October. This follows September's 4.3 per cent rise and posts the twelfth rise in the last 13 months for a healthy 15.5 per cent gain over the year. The value of housing loan commitments shows a similar story – up 2.5 per cent in October for an annual rise of 17.7 per cent. Even excluding refinancing churn, the value of housing finance commitments still rose 3.1 per cent. Commonwealth Bank economists point out that this is just 5.7 per cent below the peak of the boom in October 2003. Citibank says that homebuyers on the Eastern seaboard were borrowing more to buy their homes.

Overall, the latest figures confirm that housing market activity has bottomed out at a relatively high level – after losing some altitude in the wake of RBA action in late 2003 and again last March, Commbank says. But it’s the owner-occupier segment where the bulk of demand is with investors still staying on the sidelines. No surprise given this segment is where the greatest excesses of the boom were and still need some unwinding.

But it remains to be seen what the Reserve Bank thinks of the home borrowing turnaround – continued rises above this high trough will raise concerns that things are getting unsustainable again. This may add some pressure to interest rates next year, especially if the economy and jobs market continue to grow strongly.

But this is all happening against that backdrop of flat and falling prices. In NSW they've have fallen by almost 10 per cent during the past two years and are not expected to bounce back anytime soon. Homes are still overvalued by 18 per cent ANZ Bank says. This follows the recent OECD study which found house prices in overvalued by 52 per cent, based on a measure of value justified by rental income. Australia apparently has the highest average house prices relative to rental levels, the third-highest prices relative to incomes, and the fourth-highest levels of household debt relative to incomes out of 15 OECD countries. When considering the state of the housing market, and remembering the effect of the March rate rise, any interest rate rise in 2006 can be expected to depress the market further next year.