Next rate move could be up

Housing finance rises for seventh consecutive month, apparently driven by investors

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The next move in the official cash rate could be upwards, in an effort to cool Australia’s property market.

For the seventh consecutive month, the number of home loans has risen, hitting 52,204 approvals in July, according to the Australian Bureau of Statistics (ABS). That’s a rise of 2.4% over June, and higher than the 2.0% expected by many economists.

JP Morgan economist Ben Jarman has told AAP that although the figures came in stronger than expected, the rise was being driven by investors, rather than first-home buyers, who typically take out bigger loans. “Average loan sizes are falling,” said Mr Jarman. Investors tend to use the equity they have in existing properties to finance a property investment loan, whereas first-home buyers have no such luxury, and therefore are forced to borrow more.

Mr Jarman also said that at the same time, what you’re getting is activity that is tilted more towards the investor and less towards the first-home buyer, so you’re not getting that uplift in credit growth that you get when first-home buyers come into the market.

“It seems like there’s a lot of turnover happening in housing but not enough homes being built and not enough credit growth to make it genuinely stimulatory. Without that piece of the puzzle moving we don’t think this will really change the path of the real economy.”

CommSec chief economist Craig James said he expects the housing market to make more gains as consumer and business confidence improves now that the federal election is out of the way. “What we are seeing is more commitments being made, but budding buyers are taking their time to make a purchase,” he said. “What we would hope that, in a more settled environment, people will start spending, investing and hiring.”

Housing sector growth and credit growth are what the Reserve Bank of Australia (RBA) wants to see, to stimulate other sectors of the economy as the mining boom tapers off. But equally, the RBA will be concerned that growth is being driven by investors rather than first-home buyers.

Foolish takeaway

Loans to build new houses recorded a 2.1% fall in July over June, which may be a sign that the building and construction sector is still facing brisk economic headwinds. Building materials companies like Boral (ASX:BLD), Brickworks (ASX:BKW) Adelaide Brighton (ASX:ABC) and CSR Limited (ASX:CSR) will be hoping that July was a speed bump rather than an underlying trend.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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