The Smartline Report, Smartline Personal Mortgage Advisers

JUNE 2009

Housing's stronger story

By Ron Woods
May 15, 2009

PORTFOLIO POINT: The data shows housing numbers are improving, a sign of a wider economic recovery.

Housing finance data may not get the attention it deserves thanks to controversies surrounding the budget. Most economists will tend to overlook the data because the majority of them are chardonnay-socialists and the budget has them mesmerised.

The lack of concentration is also because many economists will tend to say, incorrectly, that the huge rise in demand for housing loans is driven by the boost to the first-home buyer’s scheme, which reinforces the attractiveness of government intervention, which is central to their way of thinking.

But the housing finance data deserves attention for several reasons:

First, it shows more signs of economic recovery. Total loans in March (excluding refinancing) were 30.5% higher than the bottom reached in August 2008 (see first chart).
Second, it shows the recovery began in September, when interest rate cuts began.
Third, the boost to first-home buyers, introduced mid-October 2008, was effective but rate cuts worked first: The number of loans to construct a dwelling bottomed in November (and has risen 24% since) but that was after all other loans had been rising for three months.
Demand from non-first home buyers is also up a hefty 20% since November (see next chart).

The number of loans to buy new dwellings has risen by more than 45% since the low in August and has returned to pre-GFC levels. This makes me wonder why “RuddBank” is necessary (the legislation to create it currently being debated in the Senate).
Finally, the cash splashed on first-home buyers (government spending) does work but interest rates (monetary policy) will also do the job without the subsidy from the rest of the population that government spending necessitates.

(Under the terms of the original first-home buyer's grants, new houses and existing houses had a $7000 grant. The Rudd government's boost meant the grants jumped to $21,000 for new homes and $14,000 for existing homes.)

The "boost" aspect of the grants will continue for six months after June 30. But the scheme will fade fast: under the terms detailed in budget papers, the “boost” (the extra on top of the original $7000 grant) will drop to $14,000 for new homes and $10,500 for established homes.)

In other words, the new housing data is more important than usual because it is likely to be indicating that the recovery appears to be consolidating as demand from non-first home buyers continues to rise; and the combined number of loans to build new or buy newly built dwellings is the highest since October 1999.

That year, 1999, was an interesting one. It was the year the last Australian housing boom began. It was also a time when there was another housing “cash splash” combined with historically low interest rates. In April 1999, Sydney suffered a hail storm where the insured loss totalled $1.7 billion, which was the largest absolute insured loss in Australian history and a hefty “cash splash”.

The hail storm triggered a frenzy of housing reconstruction activity in Sydney, which rippled through other cities as house prices began to take off. This was also at the time when interest rates had been cut to the then equal lowest since the 1960s. The combination of a cash splash (then a private one from the insurance industry) and ultra-low interest rates created a housing boom in activity and prices which lasted until late 2003.

It is too early to say there is a new boom beginning, but it is nevertheless likely not too early to say an economic recovery is under way.

Dr Ron Woods is chief economist of Econoclast.

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