Australians have continued buying homes in spite of recent rate rises, which would normally have had the effect of slowing demand. In fact, over the last two years, the number of residential owner-occupier finance commitments have consistently surprised on the upside, growing steadily since late 2004 to stand at record levels as at July 2006. So what is the driving force behind this ongoing confidence and demand?
Westpac Property this week released a report that looks into the possible reasons why this cycle is different from previous ones.
The first point the report raises is that the cash rate has been low for a long time. In fact, this cycle has run for two and a half years longer than that of the late 80s and the proportional change in cash rate has been just over half that of the February 88-November 89 cycle. Westpac suggests that this has allowed a far greater period for borrowers to adjust to a tightening cycle that has been comparatively gentle.
In addition, the mortgage industry is currently very competitive. This may also be providing an incentive to borrow.
Secondly, the unemployment rate is presently very low, sitting at 4.9 per cent in August 2006. The report suggests that this may be having a twofold effect, in that it is contributing to a greater confidence and fewer forced/mortgagee sales in this cycle which can cause a significant decline in residential values and a loss of confidence in the real estate sector.
The third factor identified is affordability. Westpac Property had been of the view that the lack of affordability as represented by the Home Loan Affordability Index (HLAI) was somewhat overstated due to the use of gross income, and that it had missed changes in the tax rates and brackets that had increased workers' take home pay.
However, it was found that on average, total net (i.e. post tax) weekly earnings had increased by 38 per cent between June 2000 and June 2006, as opposed to 33 per cent for gross earnings. The average monthly loan repayments had increased by 61 per cent over the same period, resulting in low levels of affordability whether it be gross or net income as a measure.
Therefore, over the last six years, tax breaks have resulted in affordability actually being five percentage points better than the official index indicates - not as significant as anticipated and not a likely explanation as to why the owner-occupier finance commitments are so high.
In conclusion, the team at Westpac Property expects demand will soften in the second half of the year and into 2007. It is widely anticipated that there will be a third cash rate hike of 25 basis points in November. This would take the total for 2006 to 75 basis points. Should this occur, just under half of the total increase in the cash rate since 2002 would have taken place in a 6 month period, which should dampen demand into early 2007.
