Finance and House Prices

The latest lending finance figures were released by the ABS on Friday. There were a couple of interesting figures in the pack.

The statistics on personal finance commitments show a decrease in secured finance for the construction and purchase of dwellings, down to $16.022B in April from $16.554B only a month earlier, and from a high point of $17.825B in November last year. It remains to be seen whether this is the start of a downturn or just a blip in a continuing upward trend. The trend figure is still heading up, but trend figures lag behind reality.

Personal finance commitments for the construction and purchase of dwellings tend to be closely related to the ups and downs of property values, as shown in the below graph.

Secured finance for construction and purchase of dwellings (monthly rate) and quarterly increase in the weighted average of residential properties in the eight capital cities

Rising finance and rising house prices could indicate the market is increasingly speculative, but, again, it will take more time before we know. One thing is certain: low interest rates are encouraging borrowing, which is driving house prices higher. The graph below shows the inverse relationship between borrowing and rates.

Secured finance for construction and purchase of dwellings (monthly rate) and RBA cash rate

The ebbs and flows in personal finance commitments are nothing compared to what is happening in the commercial sector. The below graph compares total personal finance commitments with total commercial finance commitments. The commercial sector is not only much bigger, but is showing runaway growth over the past year.

Total financial commitments, personal and commercial

The big rise in commercial lending is promising for Australia’s economy. It includes borrowing for a whole range of expansionary purposes, like purchase of property, construction, wholesale finance, and purchase of plant and equipment. As with personal lending, low interest rates are a big factor in this growth. Generally, though, it shows a willingness for businesses to expand. And this is good for Australia because it boosts demand in the economy.