Changes in the housing cycle

Down-trade home buyers, selling the big home and buying a smaller one, are driving a very different housing cycle to that of the past, according to the latest JPMorgan Australian Mortgage Industry report. In the past, as buyers geared up, housing credit growth mirrored the rise in house prices. But this year, as house prices have jumped, led by double digit growth in Sydney, mortgage credit growth has inched up to around 4.8 per cent “Higher house prices have resulted in higher rates of credit growth in prior cycles but this time it may be different” said JPMorgan, banking analyst Scott Manning. The co-author of the report the principal of Digital Finance Analytics, Martin North, said the change in the cycle needed to be understood by government and the regulators. “Traditionally the indicator (of a housing boom with all its risks) has been credit growth but that is a dud indicator this time,” he said. ‘We need a different approach.” Digital Finance Analytics uses consumer research based on 26,000 households to determine the nation’s buying and borrowing intentions. Two years ago the downsizers – Mr North calls them down-traders because they buy investment properties as wen as smaller homes-were sitting tight House prices were soggy; superannuation balances were in decline and only15 per cent of those with an aspiration to down trade expected to make the move in the next year. Today 45 per cent of those down traders aim to move within the year. They are cashed up, with 45 per cent expecting to move without borrowing. So they don’t show up on the traditional measure of credit growth. Yet because they are buying much the same sort of property as first homebuyers and investors, they are creating a storm of demand at the lower end of the market. Mr North, said house price growth would continue to out pace credit growth moving into 2014. “This is a very different property market environment to that before the global financial crisis, which was credit driven,” he said. ‘This time other factors are at work, and it’s likely that the already have high house prices will be further fuelled by demand from investors, households looking to trade-down and households looking to trade-up: Mr North said At the same time the competition for mortgages is increasing. The report notes that each major bank is looking to grow their mortgage book at or better than average. And the deals are becoming more aggressive. “In the current environment of improving fund spreads, and no out of cycle re-pricing with recent moves in the official cash rate increased front book discounts are now evident” note the report Mr Marming said those borrowing were able to gain discounts of at least 80 basis points. In fact some borrowers with guarantors can getup to 120 basis points the research showed that whilst average loan to valuation ratios had not changed, the figures for investors and first home buyers had ticked up in recent months. JPMorgan does see credit growth at least stabilising at around the current 4.8percentayear. “Further improvement in house prices and housing starts will see credit growth closer to 7 percent” JPMorgan forecast annualised domesticmortgagegrowthof6percent of the ANZ, Commonwealth Bank and NAB. Westpac will lag, with a forecast 4 per cent growth in the domestic mortgage book “as we await evidence of improved origination processes and broker engagement and how Westpac will offset potential pricing inertia from their premium pricing”. The consumer research showed that investors were driven most by the expectation of capital gain, then by tax efficiency and leverage, lastly, for about 20 per cent of respondents, by the better overall returns in housing than in stocks or bonds. The research also showed a large want-to-buy segment effectively locked out homeownership by high prices.