There is no housing bubble: CommSec's Savanth Sebastian

There is no housing bubble: CommSec's Savanth Sebastian
There is no housing bubble: CommSec's Savanth Sebastian
Dwelling approvals may have eased in August but it was largely driven by the volatility in apartment approvals. More encouragingly house approvals lifted by healthy 4.4 per cent August. From a longer term sense the lift in home building over the past couple of years has been extraordinary. 
Over the past year a record 225,406 new homes were approved – a boom that will continue to support economic activity over the next 12-18 months. Interestingly with the tightening in bank lending standards and news of another bank pulling back from investor loans in the last day, it is pretty clear that the lift in supply should result in a much more balanced housing sector.
There is no housing bubble, rather an imbalance between supply and demand in key markets like Sydney and Melbourne. When demand exceeds supply, prices can soar at an unsustainable rate. But the homes are being built to meet demand, it just takes time. Investors clearly must tread warily.

Private sector credit remains healthy with lending lifting by 0.6 per cent in August. From an annual sense, credit growth is holding at the best levels in over six years. The key driver remains housing and in that context it is investor housing in particular that has driven the strength.

Investor finance is up 10.7% on a year ago. However it is likely that investor demand eases over the coming year.

More encouraging was the lift in business credit. There is no doubt that businesses are still rather tentative but the lift in borrowings is certainly encouraging and resonates with the lift in business confidence and conditions. The key driver of future lending will be an ongoing improvement in labour market conditions, rise in business hiring intentions and lift in consumer confidence.

The disappointment in the latest result lies with the consumer borrowings which have been weak for the most part of this year. Interestingly the consumer credit figures may not be painting a true picture with some home owners likely to dipping into home equity to borrow at cheaper rates, rather than tapping personal loans. 
There is no housing bubble: CommSec's Savanth Sebastian

What do the figures show?

Building Approvals:

Dwelling approvals fell by 6.9% in August after rising by 7.9% in July. In trend terms, approvals fell by 0.7% in August.

House approvals rose by 4.4% in August (private sector rose 4.9%). Meanwhile ‘lumpy’ apartment approvals fell by 16.9% in August after rising by 20% in July. Private sector apartment approvals fell by 11.4% in August.

Dwelling approvals are up 5.1% on a year ago with house approvals up by 2.2% while apartments are up by 8.4%.

Across states and territories in August: NSW approvals rose by 27.1%; Victoria rose by 8.3%; Queensland fell by 17.2%; South Australia fell by 8.1%; Western Australia fell by 1.1%; Tasmania fell by 24.7%. In trend terms, approvals rose by 7.3% in the Northern Territory and rose 4.4% in the ACT.

The value of all commercial and residential building approvals fell by 5.6% in August after rising by 9.2% in July. Residential approvals fell by 3.5% with new building down by 3% while alterations & additions fell by 7.9%. Commercial building fell by 10.1% in August but was still up by 6.6% over the year (up 10.6% over the year in trend terms).

Private sector credit

Private sector credit (lending) rose by 0.6% in August after a 0.6% gain in July. Annual credit growth rose from 6.1% to 6.3% – a 61⁄2-year high.

Housing credit grew by 0.6% in August after a similar rise in July. Housing credit is up 7.5% on a year ago – the strongest annual growth since September 2010.

Owner occupier housing credit rose by 0.6% in August to stand 5.6% higher than a year ago – the fastest annual growth since January 2012. Investor housing finance lifted 0.7% in August. Investor housing credit was up by 10.7% over the year.

Personal credit rose by 0.1% in August after a flat result in July. Personal credit was up 0.7% over the year.

Business credit rose by 0.5% in August. Business credit is 5.3% higher than a year ago.

Term deposits held with banks fell by $2.2 billion in August to $509.9 billion. Term deposits are down 5.7% on a year ago – the sharpest decline in 12 years. Term deposits have been regularly falling in annual terms for 21 months – the longest period in records going back almost 30 years.

What is the importance of the economic data?

Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business.

Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

The Bureau of Statistics' monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

What are the implications for interest rates and investors?

The home building boom will support the economy over the next 12-18 months, and the benefits will last longer in Sydney given that high rise apartments take longer to build.

The Reserve Bank is unlikely to shift interest rates in any direction. Rather an extended period of time on the sidelines is the most likely outcome. 

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There is no housing bubble: CommSec's Savanth Sebastian

 Savanth Sebastian is an economist for CommSec

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