Australian housing finance commitments posted their steepest fall since the start of the pandemic, contracting by 4.4% in June as the RBA's rate hiking cycle accelerated pace. Lending to both the owner-occupier and investor segments contracted in the second quarter while refinancing activity lifted sharply as many borrowers sought lower interest rates.
Housing Finance — June | By the numbers
- Housing finance commitments (ex-refinancing) fell by 4.4% in June (vs -3% expected, previous +1.8%m/m) to $31bn, its largest month-on-month decline since May 2020. Commitments are down by 2% over the year.
- Owner-occupier commitments were down by 3.3% for the month at $20.5bn (-9.6%yr), more than reversing May's 2.2% rise.
- Investor commitments declined by 6.3%m/m to $10.5bn, slowing annual growth from 23.7% to 17.3%.
- Total refinancing accelerated by 6.2% in June to reach a new record high at $18.2bn (17.8%yr).
Housing Finance — June | The details
Although monthly housing finance commitments alternated between rises and declines over the first half of the year, June's 4.4% fall was the largest contraction posted since the outset of the pandemic, pointing to the effect from the start of the RBA's rate hiking cycle. In June, the RBA lifted its pace of rate hiking to 50bps from 25bps in May. The overall level of commitments remains elevated, however, at around $31bn.
Commitments in the owner-occupier segment were down by 3.3% in June, to be down by 2.2% over the second quarter. Weakness in the quarter was driven by upgraders (-3.6%q/q) and first home buyers (-4.5%) due to a combination of affordability constraints and rising interest rates. Underlying volumes reflected this pullback in demand, falling by 4.2%q/q for upgraders and 5.3%q/q for first home buyers. Construction-related commitments advanced (2.5%q/q), though that most reflects the escalation in building costs, with the underlying volume of approvals flat (0.4%) in the quarter.
Investor commitments saw their largest month-on-month fall since May 2020, down 6.3% in June. That left commitments 4.6% lower over the June quarter. As the chart above shows, this was the first quarter in 2 years in which lending fell to both major segments, likely marking the turning point in the cycle.
As activity in the housing market slowed, refinancing volumes were rising as many borrowers responded to rising interest rates by switching lenders for more competitive offers. The value of refinancing lifted by 6.2% in June, driven by a 9.7% lift in the owner-occupier segment. Over the quarter, the value of refinancing lifted sharply by 8.4%. By volume, refinancing approvals surged by 9.8% to a record high at 24.4k in the month and increased by 11.7% over the quarter.
The slowdown in the housing market is being driven by the two major states: New South Wales and Victoria, with weakness also evident in other states. Owner-occupier commitments in Q2 fell in NSW (-7.1%) and Vic (-3.9%), with Western Australia also down by 5.1%. Declining lending to first home buyers was a key factor in these declines: NSW -9.2%q/q, Vic -4.7%q/q and WA -7.3%q/q. In the investor segment, Queensland saw the largest quarterly fall (-17.2%) as NSW (-10.3%), Vic (-3.8%) and South Australia (-4.4%) also saw declines.
Housing Finance — June | Insights
The housing market is starting to cool after a very strong period of conditions alongside the economic recovery from the pandemic. Rising interest rates and affordability constraints are weighing on housing finance demand, with housing prices starting to decline in several markets according to the latest data from CoreLogic. With further rate hikes on the way as the RBA looks to return inflation to its 2-3% target band, the housing market is likely to continue its slowdown over the months ahead.
