The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, December 12, 2011

Housing activity was recovering robustly **before** the RBA cut rates

The ABS housing finance data released today has once again reaffirmed what I have argued here for months now: Australia's housing market was stabilising, and would likely have commenced a gradual recovery in the absence of interest rate accommodation from our recently-appointed major bank insurer, aka the RBA.

Today the ABS reports that in the month of October--before the November or December rate cuts, which have been passed on to borrowers mostly unperturbed--the number of new home loans approved to people buying existing dwellings had once again risen by a very healthy 0.9% month-on-month.

Indeed, the number of new home loans approved by Australian lenders for purchases in October--not 'refinancings'--was higher than any other month since way back in 2009. You can see the very steady ramp-up in seasonally-adjusted new home loan approvals in my chart below.

Now for some reason analysts get confused when interpreting this housing finance data. In respect of the future performance of the housing market, we don't care much for purchases of newly developed homes, which are a small fraction (circa 5%) of the total, refinancings of existing loans, the share of owner-occupiers versus buyers, nor the 'value' of loans (where the latter is affected by a range of things including the value of the homes being purchased, the types of buyers in the market--eg, first timers acquiring cheaper homes--and the policies of lenders).

The single best proxy for the demand-side of the housing market is the seasonally-adjusted number of new loans approved for the purchase of existing homes, which is around 20 times the size of the 'new dwellings' series.

Since April 2011, this benchmark has been growing healthily, averaging a stonking 2.2% increase each month. Let me reiterate, this was before two consecutive RBA rate cuts that have been passed on to borrowers.

We got the first glimpse of the impact the RBA's very generous policy reversal has had on the housing market via AFG's data for November (AFG is Australia's largest mortgage broker). This series, which leads the ABS numbers, printed at its highest level since March 2009, with investors hitting their biggest relative share in history.

Expect much more of this in 2012 as Australians seek to take advantage of sub-6% fixed-rate home loans and discounted variable rates only slightly above this level.

As I have noted too many times to count, our incredibly interest rate sensitive housing sector (which is much more so than it has been in decades past) will likely prove a very powerful hedge against adversity in the event that the RBA slashes rates. In contrast to other countries, almost all of Australia's residential borrowers are on fully adjustable-rate mortgages that typically price off the RBA's cash rate.

Why? Because circa 60% of bank funding comes from short-term retail deposits, which in turn price off the short-end of the yield curve largely controlled by the RBA. But I will leave bank funding costs for a column on another day!