Australia's housing market is showing some resilience – but here's why a fall could be on its way

Greg Jericho
·4-min read
<span>Photograph: Sam Mooy/AAP</span>
Photograph: Sam Mooy/AAP

Despite the coronavirus, the Australian housing market appears to be holding up. And yet even our strong desire to own a home is not immune to the ravages of a pandemic. While the value of home loans continues to rise the number of people taking out loans is falling, which suggests a fall in house prices could be on its way.

The latest housing figures are a good example of why it is best not to get too worried about what happens in any one month.

Related: Across Australia people are losing jobs, and it’s older workers who are suffering most | Greg Jericho

In June the value of housing finance commitments rose 6.2% – the biggest growth for more than a decade. Not since the global financial crisis stimulus packages have we seen such a jump in housing finance.

And yet no one thinks that suggests everyone is out at the weekends looking at homes to buy.

When we stretch out the period to three months we see that, even with the big jump in June, the level of finance taken out to buy residential properties was down 10% on what it was in March:

That feels much more reflective of people’s reality and yet, compared with this time last year, housing finance has still grown 4.5%.

In essence, even with the sharp drop in amount of housing finance being taken out in the past three months, there was still more money being borrowed in June than a year ago.

By contrast, the drop in employment has been so great since March that there are 4.1% fewer people employed now than a year ago.

So is our housing market immune from calamity?

When we look at the link between housing finance and house prices this would suggest so. For while price growth would be expected to slow dramatically, for the rest of the year history would suggest house prices will keep rising:

Even in Melbourne, where the biggest slowing of housing finance has occurred in the past three months, house prices can be expected to keep rising till at least the end of the year:

Similarly, if we look at the growth of house finance commitments across the nation, only Victoria saw a drop in June. While everywhere there have been large falls since March, all states and territories except Western Australia recorded a larger amount of house finance this June than in June 2019:

As has been the case for a while now, the housing market is mostly being held up by those looking to buy homes rather than investors:

The value of owner-occupier finance in June was nearly 9% higher than last year, while investor finance was 6% lower.

People, it seems, still want to own a home and are still willing to buy one, even with the economy going to hell.

So why then do economists from UBS suggest the figures indicate that house prices are likely to fall 5% to 10% off the most recent peaks?

Well, the issue is the total value of housing finance and the number of home loans.

The value is rising but the number is not.

In June the number of people taking out a home loan to buy an existing property (which accounts for three-quarters of all home loans) remains well below the number who took out a a loan in March and more than 5% below the number who took out such a loan last year:

As a rule the growth of the value and number of home loans move together. Sometimes the value grows quicker, which means that the average value of home loans is rising. At the moment that average is rising fast:

When that has occurred in the past usually we see the growth in the value fall rather than the number of people taking out home loans surge.

Were the economy doing well, it would not be surprising to see the value of home loans rise faster than the number – because you would expect house prices and thus loans to be rising.

But now is not such a time.

For now the housing market appears to be showing some resilience but the divergence in the growth of the value of home loans and the number being taken out cannot last. And unless more people suddenly start taking out home loans this means it would be unsurprising to see house prices start to drop in the next six to nine months.