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Surprise 0.7% fall in Aussie home loans

11-year-high interest rates hit borrowing for second straight month in Oct

(SYDNEY) Australia’s home loan approvals unexpectedly fell for a second month in October as interest rates at an 11-year high discouraged borrowing.

The number of loans granted to build or buy houses and apartments fell 0.7 per cent to 62,509 from September, when they slipped a revised 2 per cent, the Bureau of Statistics said yesterday. The median estimate of 21 economists surveyed by Bloomberg News was for a one per cent increase.

Australia’s central bank raised the benchmark interest rate by a quarter point last month, following a similar increase in August, to contain inflation. Higher lending rates, coupled with rising property prices, have pushed housing affordability to a record low, curbing demand for real estate.

‘The housing market appears to be feeling the pinch from higher rates,’ said Matthew Johnson, senior economist at ICAP Australia in Sydney. ‘Given that the November increase has not yet been covered by the survey, I expect to see further weakness, possibly extending into 2008.’

The Australian dollar rose to 87.77 US cents yesterday in Sydney from 87.57 cents immediately before the report.

The yield on the benchmark 10-year government bond rose four basis points to 6.16 per cent.

The total value of lending rose 1.7 per cent to A$22.1 billion (S$28 billion) in October.

The Reserve Bank of Australia increased the overnight cash rate target to 6.75 per cent, the highest since 1996, in November. Fourteen of 25 economists surveyed by Bloomberg News last week say the bank will raise the rate again by March 2008.

Yesterday’s report ‘adds to the uncertainty over a further hike’ early next year, said Su-Lin Ong, fixed-income strategist at RBC Capital Markets in Sydney. ‘This is the first back-to-back monthly decline in 12 months,’ and echoes declines that followed three rate increases last year.

About 90 per cent of mortgages are taken out on a so-called floating rate, which is tied to the central bank’s benchmark.

November’s rate increase added about A$42 a month to the average A$250,000 home loan, according to the Housing Industry Association.

An expansion in Australia’s construction industry slowed in November, according to a report published last week by the Australian Industry Group and Housing Industry Association.

‘There are definite signs that continued upward pressure on interest rates, higher construction costs and capacity constraints are weighing on growth,’ said Tony Pensabene, associate director of economics and research at the Australian Industry Group.

Housing affordability dropped to the lowest level on record in the third quarter, according to an index compiled last month by Commonwealth Bank and the Housing Industry Association. Almost one-third of the average first-home buyer’s income is spent on mortgage repayments.

Lending to owner-occupiers rose 1.1 per cent to A$15.2 billion. The value of lending to investors who plan to rent or resell homes gained 2.9 per cent to A$6.94 billion.

Still, there are signs an increase in building work has spurred Australia’s economy in recent months. Housing construction rose 1.4 per cent in the third quarter from the previous three months, when it declined 1.5 per cent, a report published by the government on Dec 5 showed. The increase contributed 0.1 percentage point in the quarter to gross domestic product, which rose one per cent.

The nation’s economy, now in its 16th straight year of expansion, is benefiting from rising Chinese demand for commodities that is prompting companies such as Rio Tinto Group to boost hiring.

Australia’s job-vacancy advertisements rose 0.7 per cent in November, according to an Australia & New Zealand Banking Group report released in Melbourne yesterday.

Yesterday’s home lending report ‘wasn’t as strong as banking industry figures had suggested, but was still resilient in the current circumstances given high interest rates and credit-market difficulties’, said Andrew Hanlan, senior economist at Westpac Banking Corp in Sydney.

Loans to build new houses rose 2.6 per cent in October from September, the report showed. The number of loans to buy newly built dwellings fell 9.4 per cent.

 

Source: Bloomberg (Business Times 11 Dec 07)

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