A small decline in new home loans in June has done nothing to suggest house prices are not set to keep rising.
In June, for the first time in a year, the value of new housing loans was smaller than the month before. The total value of new housing loans fell 1.6% and owner-occupier loans dropped 2.5%:
Is this a sign the housing market is about to cool off, and some semblance of reality will return to house prices?
Oh you sweet naïve thing. Of course not! We’re talking about the Australian housing market here – nothing will prevent its lunacy from continuing!
The past year has shown that house prices will always be a major concern of governments – not their affordability; but that they keep going up.
There was a time that those who like to bang on about immigration were suggesting immigrants and other foreigners coming here and buying property were the big cause of rising house prices. Their views have been dealt a pretty massive blow, as our population essentially remained steady due to Covid restrictions and yet prices soared.
It helps of course that the government’s homebuilder program and the current record low interest rates means now is a relatively good time to build and buy a home if you have a secure job.
The Morrison government decided to keep construction work going not through infrastructure but private homes – and thus the homebuilder program ensured house prices would not drop during 2020 in line with employment.
But while the amount of home loans fell in June, they remain massively above the level of a year ago:
And while the total amount of new home loans for owner-occupiers remains at record levels, now investors have come to the party.
In June there was $9.2bn worth of new investor housing loans – just below the record set back in 2015:
When investors are in the market, housing prices rise.
The strong growth in finance is not confined to any state – all have seen big increases over the past year:
Western Australia – that most isolated and strongly-bordered state – leads the way with new loans 113% higher than June last year.
And even while South Australia and Tasmania might seem to be spared some of the massive growth experienced by other states, all states are seeing much higher growth relative to what they experienced in 2018 and 2019.
The problem for those who still have desires to one day buy a home is that the link between housing finance growth and house prices is very strong.
This is not surprising, you take out a home loan to buy a home. The more people who do that, the greater the demand there must be, and thus prices rise.
There is about a six month lag between the growth of finance and house prices.
This suggests that by the end of this year we could see a very strong surge in prices:
The relationship is not one-to-one, so just because housing finance is up 83% that does not means house prices by December will be 83% above what they were in December 2020.
But if the relationship holds, average residential prices across the country by the end of this year would be just over 30% above what they were at the start of this year:
That would be a scary level of price growth.
In Melbourne, the relationship of finance and prices is a bit closer than it is on average across the nation:
As a result, if all things stay the same, Melbourne prices by the end of this year will have risen nearly 45% compared to the start of 2021.
Across the nation, should the relationship between housing finance and house prices remain, record price growth will be set – perhaps up to 47% annual growth in Perth:
That of course is if prices act the way they have in the past.
There is certainly no guarantee of that – especially when we have states in the midst of various levels of lockdown and the uncertainty that we had last year returned to perhaps knock the confidence out of the market.
But for now, the one thing we can say about the pandemic is that it did nothing to deter people, investors and governments from sending house prices ever higher.