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Interest rate rise defied by housing finance figures

Interest rate rise defied by housing finance figures

The number of new home loans for owner-occupiers rose 2.5% in November, the most since May, despite higher interest rates.

Update: Home loans rose by the most in six months in November while lending to buy new homes jumped, a positive for the economy and a major surprise given mortgage rates had risen sharply that month.

Data released by the Australian Bureau of Statistics today showed the number of loans to buy owner-occupied housing rose 2.5 per cent, handily beating forecasts for a 1.5 per cent fall.

The report also showed financing for new homes climbed 9.7 per cent and loans to build new homes increased 2.7 per cent.
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Lending for investment housing, however, fell 2.3 per cent.

The Australian dollar gained about a fifth of a US cent in the wake of the report, having earlier plumbed a one-month low around 98.03 US cents on worries the worsening floods in the country's northeast will crimp economic growth.

"There is certainly evidence here that housing lending has troughed," said Scott Haslem, chief economist at UBS. "This is clearly a positive for some modest pick-up in housing credit growth which has been ebbing lower over recent months."

The gains came despite a move in early November by the Reserve Bank to raise its cash rate 25 basis points to 4.75 per cent as a pre-emptive strike against inflation. Major banks lifted mortgage rates even more, blaming higher funding costs in the wake of the global financial crisis.

That prompted a political outcry and fuelled voter anger, leading the government to tinker with the banking sector to try and boost competition.

Banks have grabbed the lions share of the mortgage market since the financial crisis as many non-bank lenders struggled to find funding.

Non-bank lenders' comeback

Today's data suggests non-bank lenders are beginning to make a comeback, with their loans climbing 18.4 per cent in November while bank mortgages dipped 0.2 per cent.

Still, with interest rates now deemed to be in restrictive territory, broader housing market activity is likely to remain muted in the first half of this year, said Michael Turner, strategist at RBC Capital Markets.

"Without wanting to disregard a positive piece of data, we are sceptical that this level of housing finance will be maintained," he said.

"The numbers do, however, leave us marginally more comfortable expecting further RBA tightening in late Q2."

Flood effect

The unexpected growth in the number of new home loans in November will have little effect on interest rates until the full toll of the Queensland floods is known, economists said.

‘‘Our view before the floods is that the RBA would be on hold until April,'' CBA's Mr McIntyre said. ''It’s too early to say at this point what the economic impact will be.’’

Commonwealth Bank was holding to its April rate rise prediction, although there is a chance the RBA’s decision to raise the cash rate by 25 basis points in November could impact on the December Housing Finance figures.

‘‘It could be December, or maybe January, but we could be seeing some insulation from our strong labour market, which could buffer interest rate rises.’’

Citigroup global markets director Paul Brennan said the better-than-expected housing finance figures showed the correction in housing was beginning to level out.

‘‘But building approvals are still down,’’ Mr Brennan said. ‘‘Trend is down about 15 per cent from the peak early in 2010, so it just tells us that housing is going to detract from GDP growth over the next two quarters.

‘‘Obviously, there is going to be a big boost to housing construction with all of the floods in Queensland, but that’s a story for later in the year.’’

The RBA had already factored the detraction in growth into its forecasts, he said.

The central bank will keep the cash rate on hold in February, Mr Brennan said.

‘‘The housing finance numbers are still broadly consistent with the view they would have had. ‘‘They will be on hold through to the middle of the year.’’

Financial markets are currently rating the probability of one interest rate rise by the RBA in 12 months' time as an 84 per cent chance, according to Credit Suisse.

Posted by AAP, Reuters, with BusinessDay on 12th January, 2011 | Comments | Trackbacks

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