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Record breaker: Home loans and sentiment

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Published on: Thursday, July 09, 2009

The consumer sentiment index has recorded the biggest back to back gain in records going back 36 years. The index rose by 9.3 per cent in July – and now holds at 19 month highs.

The number of new housing loans is at 16-month highs, lifting by 2.2 per cent in May. Loans for new construction rose by 8.0 per cent to stand at 6,334 – a seven year high. The value of owner occupied loans rose to $17 billion - a record 26 year high.

First home-buyers account for over 29 per cent of home loans taken out – the highest on record. Banks account for almost 92 per cent of all loans. The average loan stood at $266,900, up 9.6 per cent on a year ago.

What does it all mean?

The latest consumer sentiment survey is certainly eye popping. Despite rising fuel prices, falling equity markets and a crumbling US labour market, domestic consumers are decidedly more optimistic, with sentiment levels holding at 19-month highs. Just as pessimism breeds pessimism it may be that the optimistic view over the last few months is similarly infectious.

Consumer sentiment is well and truly out of the doldrums. The combination of rate cuts, fiscal stimulus and the perception that the worst is behind, has seen a substantial shift by consumers to being more optimistic about the future. The lift in consumer sentiment over the last two months represents the largest back to back increase in records going back 36 years.

It all comes back to job security, and with unemployment expected to rise over the next year sentiment levels are likely to retreat from these exuberant levels.

The latest round of housing finance figures has reinforced the strength of the housing sector. Overall, the value of owner occupied home loans is at the highest level in records going back 26 years. Importantly the total number of new housing loans is also at the best levels in 16 months.Those people that are looking to build their new dream home may need to lock in their builder now. New construction loans have surged by 8 per cent in May - racking up an almost 50 per cent increase since December - and are holding at levels last seen over seven years ago.

The sustained improvement in overall housing activity, and more importantly the substantial jump in construction of new dwellings, will have multiplier effects throughout the economy. The sharp lift in home construction should ensure economic growth remains well supported.

Prospective home-buyers are certainly finding the current conditions quite attractive and first home-buyers are taking advantage of the government’s additional boost. Over May almost 20,000 first home buyers have taken out new loans the best result in records going back 18 years.

What do the figures show?

Housing finance: The number of new owner-occupier housing loans rose for the eight straight month in May, lifting by 2.2 per cent. The number of home loans (63,855) is at 16-month highs.

Construction loans rose by 8.0 per cent, while the purchase of newly erected dwellings rose by 2.9 per cent. The number of new construction loans (6,334) is at seven year highs. Loans for the purchase of established dwellings rose by 1.5 per cent while refinancing rose by 0.5 per cent.

The value of new housing commitments (owner occupier and investment) rose by 2.3 per cent in May. Investment loans rose by 2.4 per cent while owner-occupier loans rose by 2.3 per cent to $22.7 billion – a record 26 year high.

First home buyers accounted for 29.5 per cent of all lending in May – the highest proportion on record (18 years).

The average loan stood at $266,900, up 9.6 per cent on a year ago.

Banks financed 91.7 per cent of all home loans (by value) in May – holding near 33 year highs.

The index of consumer sentiment rose by 9.3 points or 9.3 per cent to 109.4 in July. The sentiment index is now up 38.5 per cent on a year earlier.

The current conditions index rose by 5.1 per cent, while the expectations index surged by 12.0 per cent.

Four out of the five components of the index rose in July.

The estimate of family finances compared with a year ago fell by 0.9 per cent while the estimate of family finances over the next year gained by 3.0 per cent. Economic conditions over the next 12 months rose by 19.6 per cent while the measure of economic conditions over the next 5 years rose by 15.7 per cent. The measure on whether it was a good time to buy a major household item rose by 9.5 per cent.

What is the importance of the economic data?

Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.

Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. Roy Morgan conducts a survey of consumer confidence. Both surveys are aggregated from responses to questions on the current and likely future state of family finances, current and likely future state of the economy and whether it is a good time to buy a major household item. Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

The concerted efforts by the government and the Reserve Bank to stimulate the economy are having the desired effect. Job security remains the one major concern for budding home buyers. If employment manages to hold up relatively well in coming months, demand for homes should gain significant momentum

A sustained improvement in housing activity and stability in global economic conditions is likely to see the Reserve Bank remain on the interest rate sidelines in the near term.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



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