Housing finance continues to fall – Tim Reardon

Housing finance continues to fall – Tim Reardon

The number of loans by banks for the construction of a new home fell by 2 per cent in the month of November to be 9 per cent lower than the previous year.  The flow on from this is that construction will continue to slow in the first half of this year.  The HIA’s Principal Economist Tim Reardon helps us understand the implications.


Kevin:   … ABS data released reinforces the trend of a market continuing to ease back from its record highs, that’s according to Tim Reardon, HIA’s principal economist who joins us to talk about that. Good day, Tim, how’re you doing?

Tim:   I’m very well, thank you. –

Kevin:   Some sobering figures there on finance figures. Tell us a little bit about how that’s going to play out, do you think?

Tim:   Yeah, so what we’ve seen since the end of 2017 is the market has gradually cooled, and we expect that over the course of 2019 we’re going to continue to see that happening. Now, it’s important to understand that when this cycle began, that the market was at record highs, significantly above any other previous peak. And what we saw was late 2017, the Sydney market started to pull off. From March 2018, the Melbourne markets pulled off, and we expect that that slowing down in building activity will continue to permeate through further out into those states, and some slow down in the other states, as well. And so that will see building activity throughout 2019 continue to slow down.

Tim:   And so, as you said, the finance data that was out yesterday showed finance down 10%. Building approvals, which were out last week said that the lowest level since 2013, and today we have new home sales which show us that they’re back to the same levels they were in 2012.

Tim:   So, new home sales is our first indicator as to what’s going on in the market, so that those new home sales turn up six months before they turn up in building approvals. So, it’s the first sign that we’re certainly not at the bottom of this cycle, and probably towards the end of 2008, the slow down in building activity accelerated. So, for builders at the start of this cycle, they may have had 18 months to two years worth of building work in the pipeline, they’re seeing that pipeline worth of work shrinking.

Tim:   And so at this stage it’s not turning up in terms of employment or a slow down in activity, but we’ll expect over the course of 2019 that the building activity will slow. Building activity on the ground, that is, will start to slow down, and builders will have less work on their books.

Kevin:   So what are the indicators you’ll be watching out for? Is it employment?

Tim:   Well, employment is the one that the politicians will be following closely, and that will probably start showing up in employment data around about May, around about the time we’ve got an election. I do also keep in mind that every time we have a federal election we do see a downturn in building activity, as well as a downturn in new home sales just as people are increasingly cautious. But, these December results are probably not affected by the election cycle at this stage.

Tim:   But, yes, the concern from an economy perspective is that now we have 1 in 10 Australians employed in the construction sector, and the economy has never seen building activity contract from such high levels. So, as a consequence, that the building activity over the past three years has really carried GDP forward, as we see building activity show, it may take a half a percentage point off that GDP figure, and see upward pressure on employment unless some other sector of the economy steps up to the plate.

Tim:   And so we saw building activity stepped up to the plate when mining activity slowed. We don’t know what the next sector is that might step up to the plate there and drive economic growth forward.

Kevin:   We’re hearing a lot of reports, particularly from strategists and buyer’s agents and so on about how difficult it is for people to get finance. There seems to be a retraction, not only from the banks in lending, but, you know, in people’s ability to get finance Tim.

Tim:   Yeah, so, we surveyed our members late last year and asked them those questions. There’s certainly been a lot of anecdotal stories around that. We found two interesting things. One is that the number of loans being rejected has increased from 17% to around about 50%, just under 50%.

Kevin:   Oh, gee.

Tim:   Yeah, that is a significant result. To consider that it was an anomaly to be rejected for a loan, to now knowing that you’ve only got a 50% chance is certainly, particularly then for new home buyers or first home buyers, I should say, the probability there for rejection is probably higher given that they have lower collateral levels.

Tim:   The second piece of information is the time frame for people to get a loan has increased from around about two weeks to around about two months. And so, that’s a lot of what we’re seeing at the moment in new home sales is that because people aren’t able to access finance because it’s taking months rather than weeks, we’re seeing a little gap in the pipeline of activity coming through there.

Kevin:   Are you hearing from developers, from builders, that they’re mothballing a lot of sites now?

Tim:   I wouldn’t say a lot of sites, but there’s certainly a slowdown in activity. I think that we haven’t seen apartment construction slow down to the extent that we might expect it to have happened at this stage. Still a large number of those getting approved and selling and commencing work. But over the course of 2019, we’d expect to see a little more of that.

Tim:   One of the areas that has been quite significantly affected is new detached houses. So that’s new homes, usually in growth suburbs and out of metropolitan areas. And because of the volume of apartments that have come online, a lot of first home buyers and investors are drawn into those apartments that are coming online at the moment. And as a consequence, that’s taken a lot of the heat out of the new home market.

Tim:   And so, for those developers releasing land at the moment, we’re certainly hearing that a lot of those are not being taken up or ballots are being handed back in. That’s certainly a dynamic that’s happening at the moment. But that’s something that we haven’t seen for a number of years, because the industry is at such record highs, but traditionally it happens in market cycles, so we’re heading back into a more normal cycle, so back towards more average levels of building activity.

Kevin:   Tim, thanks so much for your time.

Tim:   Pleasure.

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