October 2021 Lending Indicators

Lending to owner occupiers fell in October. The flow through from September's relatively higher sales (compared to the quiet July and August) hasn't yet filtered through. We're seeing the dangers of using lending indicators as a metric for predicting future price directions in a lot of the commentary out today, with people pointing to the dropping lending as an indicator of a slowing in price growth.

There is a slowing in price growth, there's no doubt about that. There is also a drop in lending. But the two aren't related in this case.

Matthew Hassan from Westpac points this out:

"Note also that previous lockdowns have tended to have delayed impacts on finance activity. The full hit from the national lockdown that began in March last year come through in May. Similarly, Vic’s second wave lockdown, which began in July, impacted finance approvals through Sep-Oct. It seems likely that the ‘delta’ lockdowns that began in Jun-July-Aug are seeing a similar delayed impact in Aug-Sep-Oct. Note that these delays will, in part, reflect lags between application submissions and final approval."

Quite simply, these lending numbers are numbers and values of loans signed by home purchasers. They are not a predictor - they are a reflection of the number of sales in the previous period.

The reason charts of lending and price growth line up nicely is because momentum is a factor in real estate prices, and price growth is a good predictor of volumes of sales. Prices growth this month is a good indicator of prices growing next month - that's momentum. Growing prices draw sellers out of the woodwork, leading to higher numbers of sales (and therefore signed loans).

The above chart hopefully puts the headlines about investor loans reaching historic hights into perspective. The ratio of investors is still far below previous peaks. Loan sizes have grown, and therefore the absolute totals of new loans approaching previous heights doesn't mean that investor participation is similar.

As expected, renovation lending growth is slowing, but, at least in part, that's because the comparisons are now with the boom that started last year.

Note that these charts use seasonally adjusted ABS Lending Indicators data.